Saturday, March 07, 2009

Nouriel Roubini's Interviews With Time and SCMP

Got to keep up with what Nouriel Roubini is saying now. More gloom? We also need to keep in mind that Roubini's views may be tempered as he is now advising Obama's inner circle on economics policy and strategy.

From Time Magazine:

Roubini Sees More Economic Gloom Ahead 342009time_250.jpg

Economist Nouriel Roubini, chairman of New York City–based research firm RGE Monitor, earned the nickname "Dr. Doom" by warning as early as 2005 that America's speculative housing boom could trigger an economic crisis. At the time, he was dismissed by many as a perpetual pessimist. Today, he's a sought-after analyst and a popular guest on financial-news programs and websites — and he is as gloomy as ever. Over breakfast in Hong Kong this week, the New York University professor talked with TIME's Michael Schuman about the perils that lie ahead if governments do not do more to confront the myriad problems facing global financial markets and economies.

TIME: Where is the global economy heading from here? Roubini: My concern right now is that this U-shaped recession we are in could turn into something much uglier, meaning a Japanese-style L-shaped recession: near stagnation or stag-deflation. We're in the worst global synchronized recession in the last 60 years. Unless we take the right policy actions, we'll end up in a near depression. I did not want to use that term six months ago. At that time, I said the chances of a near depression were only 10%. But today those chances are 33% or so. (Read "25 People to Blame for the Financial Crisis.")

How can this be avoided? You have to have a set of concerted, coherent policies done not just by the U.S. but by Europe, Japan, China and everyone else. The credit crunch is just massive. One thing that's needed is much more aggressive monetary easing. The second dimension is that you need much more fiscal stimulus — in the countries that can afford it — that is front-loaded. The U.S. [stimulus package] is $800 billion, but only $200 billion is front-loaded. Of that $200 billion [in stimulus] this year, half of it is tax cuts. That's going to be a waste of money, because people are not going to spend it.

Why hasn't the banking mess been cleaned up? You have to do triage between banks that are illiquid and undercapitalized but solvent and those that are insolvent. The insolvent ones you have to shut down. You need more aggressive credit creation by the government, or you have to force the banks to lend. We're in a war economy. You need command-economy allocation of credit to the real economy. Otherwise, the incentive individually for every institution is to pull out, not extend credit. Not enough is being done. (See which businesses are bucking the recession.)

What do you think of President Barack Obama's progress so far? I have to give [the members of Obama Administration] credit. In about six weeks, they have done three major things: the $800 billion stimulus package, a mortgage program that is much more than the previous Administration did and a bank plan that, however flawed, at least has the benefit of not having another bailout of the banks. The glass is half full. But for each one, there are some flaws ... the bank plan wants to pretend that the government is half pregnant with the banks. The debate is between partial and full nationalization, not between nationalization or no nationalization. Go and do the job and do it right by taking over the banks and restructuring them and selling them back to the private sector.

What's the best-case scenario? If you do everything right, you avoid an L, and that's really good news. But you still have a situation in which global growth this year is negative. GDP growth in advanced economies is going to be negative through the fourth quarter of this year, and next year, growth will be anemic — probably 1% or lower. Job creation is going to be negative. Even in the best scenario, there will be job losses through the end of next year. In the best of circumstances, we have a two- to three-year recession in advanced economies.

Is there a part of the world you are especially worried about right now? I'm worried about every part of the world. People thought the rest of the world would decouple from the U.S. That was nonsense. Emerging Europe is on the verge of a fully fledged sovereign-debt, banking and currency crisis. I think China is in a near recession right now. Many emerging markets, even those that are in better shape, are in severe trouble. I don't think there is any economy in the world right now that is safe.

Is a breakup of the European monetary union possible? I don't see that as being likely, but the probability of that eventually happening is rising. Right now, we are facing a situation in which many countries now have banking systems that are too big to fail and also too big to be saved. If Ireland or Greece go bust, then there is already a commitment from the Germans and French to, one way or another, bail them out — because they know that otherwise the monetary union is going to collapse. But if you have to rescue on top of them Austria and Italy, Portugal and Spain, and Belgium and the Netherlands, then that is not going to be possible. I am still of the view that we can avoid a collapse of the monetary union, but this is really the very first true test of its stability.

Many people are pinning their hopes on the Chinese government to stimulate demand. Is that justified? I have to give credit to the Chinese. Their fiscal stimulus will contain the degree of economic contraction. But China is radically dependent on U.S. growth. Forcing state-owned enterprises and banks to spend more when you have overcapacity, or to lend more when there are already large [amounts of bad debt], is going to postpone a problem, maybe by a few months. But it will lead to a harder fall down the line. A hard landing is unavoidable, given what has happened to the rest of the world.

Any good news out there? Honestly, as of now, I don't see any. Policy is moving in the right direction. My concern is this is too little, too late.


From South China Morning Post:

A small glimmer of hope at breakfast with Dr Doom

Tom Holland

The prophet of doom was in a relatively cheerful mood yesterday.

"Honestly, as of now I don't see any good news," he said brightly, tucking into breakfast at Hong Kong's Four Seasons Hotel.

This economic crisis has been no respecter of reputations. Financiers, regulators and politicians have all seen their good names shredded since the credit crunch first began to bite in mid-2007.

Even Warren Buffett's halo has slipped. Last week, his Berkshire Hathaway investment firm announced a 10 per cent decline in asset value for last year after ill-timed bets on oil company ConocoPhillips and shares in Irish banks.

But not everybody has suffered. If anyone emerges from this crisis with his reputation enhanced, it will be Nouriel Roubini, the New York University economics professor who was one of the few forecasters to see the crash coming.

As long ago as July 2007, before most of us had even heard of the term subprime, Professor Roubini was warning that the bursting of the US credit bubble would lead to recession.

Then in February last year, he published a paper entitled Twelve Steps to Financial Disaster, in which he forecast, among other things, the collapse of the US stock market, the failure of a number of Wall Street investment houses and government intervention to rescue America's crumbling banks.

Ever since, Professor Roubini has become the go-to guy for media in search of catastrophic predictions about markets and the economy, earning himself the nick-name Dr Doom in the process.

Yet, while Professor Roubini's current forecasts are suitably gloomy, they are not entirely black.

Although he says a protracted and deep global recession is unavoidable, he believes concerted government action can still prevent the inevitable U-shaped recession from turning into a worst-case L-shaped depression.

Unfortunately, the risk that recession will become depression is rising. Part of the trouble is that fears of a downturn are self-fulfilling. Anticipating a slump in demand, companies are cutting capital investment, production and jobs.

Of course, that suppresses incomes, which makes it even harder for savers whose wealth has been eroded by the 27 per cent decline in US property prices and the 55 per cent fall in the stock market to repair their balance sheets. As a result, the downturn in consumer demand will be even deeper and more drawn-out than many economists expect, warns Professor Roubini.

That, in turn, is bad news for Asia, and especially for China, which remains heavily reliant on exports and export-related investment to power economic growth.

With declining imports of raw materials and intermediate goods signalling that further falls in China's exports are on the way, Professor Roubini has few expectations that Beijing's stimulus spending can keep growth ticking over for long. Although he gives China's leaders full credit for trying to support demand with public spending, he says official stimulus efforts are only likely to postpone the economic crunch for a few months.

"A hard landing is inevitable, given what's happened in the rest of the world," he warns.

Retooling the Chinese economy to run primarily on domestic consumer demand will take five to 10 years. In the meantime, Professor Roubini says, world governments need to co-ordinate their policies across six key areas if they are to revive global demand and prevent recession from slipping into depression.

First, central banks need to loosen monetary policy far more drastically than they have done already, adopting "quantitative easing" measures, for example by buying more types of securities.

Even so, loosening monetary policy when demand has stalled tends to be as effective as pushing on a string so, secondly, governments especially in Europe need to ramp up fiscal spending further to boost demand.

At the same time, governments must do whatever it takes - including full nationalisation - to clean up their banking systems or risk ending up facing a lost decade like Japan in the 1990s.

Fourth, policymakers need to force banks to resume lending. Professor Roubini explains that the present credit drought is partly a problem of collective inaction. With a lack of credit threatening the survival of businesses throughout the economy, no bank wants to be the only one to lend money, even to creditworthy companies, lest its borrowers are hurt by failures at other credit-starved companies.

Fifth, governments of economies hit by property slumps should introduce an across-the-board reduction in the principal value of mortgage debts to relieve the pressure on insolvent households.

And finally, major shareholders should sanction an immediate doubling of the International Monetary Fund's capital base so it can extend effective assistance to emerging markets facing liquidity problems because of the crisis.

Even in a best-case scenario where everything happens according to his script, Professor Roubini warns that the world still faces an economic contraction this year and growth of less than 1 per cent next year, with the developed economies growing at below trend rates through 2011.

Yet, despite his gloomy reputation, he still believes his worst-case scenario of an L-shaped depression can be avoided. And he gives a cautious thumbs-up to the administration of United States President Barack Obama, awarding its economic programme so far an A for effort, if only a B for results. "At least policy is moving in the right direction," he says.

That might not be much, but it is something. Clearly, with Dr Doom, cheerfulness is relative.

p/s photo: Michelle Yip Shuen


Razali Razman said...

Dear Mr Dali,

Like the blog (and the girls too!).

If the best case scenario is a U shaped recession, than we are in deep trouble. But if people think we are in deep trouble, then they will not spend and keep cash instead of invest. We are in a negative cycle that reinforces itself.

I just hope the government knows what it is doing. Never has domestic demand been so important to the economy. I thought the people who came out in droves to the shopping complexes in December saved us from going underwater in the last quarter. Unfortunately that will not be enough to save us this year.

Colin said...

Should also see views of Andy Xie

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