MacroScope

Dr. Doom goes to Beverly Hills

May 3, 2012

When it comes to predicting a dark future, Nouriel Roubini – the NYU economist who earned the moniker Dr. Doom after he correctly predicted the financial crisis – is not about to let anyone get in his way.

Even if it’s his host. And even, or maybe especially, when there are 500 witnesses.

That’s precisely what happened Wednesday morning, when Michael Milken – the former junk-bond king – shared the stage with Roubini at Milken’s Global Conference. What was billed as an interview in one of the Beverly Hilton’s grand ballrooms had the feel of a pitched battle.

Roubini warned of a massive oil shock following a potential clash between Iran and Israel – or possibly the United States, sometime after the November presidential elections.  He talked about geopolitical instability in the Middle East. “It’s a mess,” he said.

Milken countered with a graph showing the U.S. has bigger fossil fuel reserves than any other country in the world, and suggested that natural gas, extracted from shale reserves that are largely outside the Middle East, will eventually make Arab clashes irrelevant to energy.

Roubini: “I think people are a bit too optimistic about how fast the shale revolution is going to occur…. I think people believe that in five years from now we are going to be energy independent – I think they are deluding themselves…  I think it’s more like a 10-20 year process.”

Milken: “I think I want to answer that with leadership.”

“Where is the leadership?” Roubini responding, calling for a tax on carbon (“mission impossible in the United States”), and subsidies for converting cars and trucks to natural gas. “I’m not sure we have an energy policy.”

Having demolished energy, Roubini went on to torpedo Europe, where he thinks the euro will unravel under the pressure of “austerity fatigue” among the euro’s poorer members and “bailout fatigue” among its richest. Onto the United States, where a looming fiscal cliff next year will sap GDP growth, and political gridlock will continue no matter who is elected president.

“Okay,” Milken said, clearly exasperated by the tirade, and drawing a laugh from the crowd.

“Oh, you think the two parties are going to get together and reach a happy agreement?” Roubini needled, to a much bigger burst of laughter.

Milken tried again, showing a chart of U.S. stock prices having recovered their ground since their swoon during the financial crisis.

“For 10 years the stock market’s been flat,” Roubini observed.

“But that’s not the point,” Milken said. “The point is tens of trillions of dollars of value has been created…’

“After they’ve been destroyed,” Roubini interjected.

And so on until the end, when Milken closed with a monologue, ending the session before Roubini had a chance to interrupt him again.

Comments
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This is a fight between bubble economies and non-bubble economies. When the top marginal income tax is high, say 74% under LBJ/Nixon/Ford/Carter, bubbles are unlikely; the OPEC blockade was external. Otherwise, you get bubbles in defense in the 80s or dot-coms in the 90s or housing in the 00s. Milikien’s 80s fortune was from his junk-bond business that earned $500M/year, easily double that in 2012 dollars. Maybe if Stephanie/Thom/Randi were allowed to compete with Beck/Rush/Hannity on the radio this would be common knowledge.

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