Wednesday, November 26, 2008
Roubini Likes Something
NEWSWEEK: What are your thoughts on the team Obama assembled?
Nouriel Roubini: The choices are excellent. Tim Geithner is going to be a pragmatic, thoughtful and great leader for the Treasury. He has experience at the Treasury and the IMF [International Monetary Fund], then the New York Fed. I have great respect for both Geithner as well as Larry Summers. I think both of them in top roles in economics in the administration were good moves. I think very highly of them both.
What are the first things they need to tackle?
R: First one is the fiscal stimulus, because the troubled economy is in a freefall, so we really need to boost aggregate demand, and the sooner and larger the better. The second thing they should do is recapitalize the financial system. Most of the $700 billion is going to be used to recapitalize banks, broker dealers, finance companies and insurance companies. To do it aggressively and fast is going to be important.
The plan Obama has talked about includes spending on infrastructure and energy development to create jobs. How likely is that to produce long-term aid to the economy?
R: We need to do it because demand and spending and housing are literally collapsing. That will get a boost from public-sector spending: [spending on] infrastructure, unemployment benefits, state and local government aid, more food stamps. We're going to have to think larger, but I don't think you can pass most of it until January when [Obama] comes to power. We're going to have to wait, because nothing seems possible for the time being. But I expect most of his plans towill pass once the new administration is in power.
Obama is largely powerless for the next two months. What's your outlook from now through January?
R: The lame-duck session of Congress really needs to spend on unemployment benefits, aid to save the local governments and on food stamps. Those things are very short-run and are very important. It's really the most we can do for now.
Your view of the economic future is often a bit less than optimistic. What does Obama's team signal about what could be coming?
R: Look, he wants to get things done, so he's choosing a really terrific team. To me, it says that he's choosing people who have great experience. He's choosing people who are pragmatic and who realize the severity of the national problem we're facing. They're knowledgeable about markets, about the economy and the political process in Washington. These are the very best people he could have chosen. I can't look too far, but it's a very good signal of what he wants to do.
A few additional caveats on this interview, according to Roubini:
First, I told the Newsweek reporter – as full disclosure – that I had worked for Tim Geithner and Larry Summers when they were both at Treasury: I was head of a Treasury Office and the Senior Advisor to Tim Geithner in 1999-2000 who was at that time the Under Secretary for International Affairs while Larry Summers was Treasury Secretary. So some may that my positive views of the two may be biased/tinted by my working for them; on the other hand I know first hand about them and I have the greatest respect for their skills, intelligence, expertise, commitment to sound public policy and policy wisdom even if I may not always agree with all of their views.
Second, I have also to add that – as I argued in an interview with CNBC Monday morning - while I have the greatest respect for the new Obama economic team, they will inherit a huge economic and financial mess that will be extremely hard to fix even if they were to implement the most sound and consistent economic and financial policy package. This is going to be the worst US recession in decades as the strapped US consumer is now faltering. The recession train and the financial crisis train have left the station. What policy can do – at best – is to minimize the financial and economic losses and limit the extent and severity and length of the economic and financial crisis, not to prevent it.
President Elect Obama and his top notch team will inherit two wars and the worst economic and financial crisis in decades. So expect very difficult times ahead for the economy and for financial markets regardless of the best effort of Obama’s excellent economic team in trying to address these problems. Even a massive fiscal stimulus, a more rapid and coherent plan to recapitalize financial institutions and resolve the credit crunch, an aggressive plan to reduce the debt burden of insolvent household, and more aggressive and radical set of unorthodox monetary policies will not prevent a global stag-deflation in 2009 and possibly longer.
p/s photos: Kou Shibasaki