Wednesday, August 20, 2008

Nouriel Robini: "Told You So"

For those who don't follow the dismal sciences, Nouriel Roubini is an economist who quite frankly nailed this whole mess. He is someone I've followed the past few years, and as I've stated in the past he sort of has a spooky demeanor and sullen look, with an accent that makes it all sound that much more worse when you hear his predictions versus read them. We have a link in the left margin of the blog to his website and while I don't have as much time nowadays to keep up with it, I still try to read as much as I can of him. When last we left Roubini pre Bear Stearns bailout [Mar 13: Scary Stat of the Day: Roubini Calling for $1 Trillion - $3 Trillion in Losses] the punditry across America was STILL in denial about the problems and the popular figure of the day (I believe this was during the 3rd kitchen sink quarter - we're up to 5 now) was $300 Billion in losses. Well fast forward less than half a year and we're over $500 Billion on the way to a trillion. And if not for central banks interventions we'd literally have a financial system blown back to the Stone Age. Because after all, when you lightly regulate a system of self serving, greedy humans they will "self police" themself wonderfully! :)

The New York Times has a big write up on Roubini below - I've included the photo for added spook. What I find ironic about economists is despite being called the dismal science they really are no different than normal humans - they drink Kool Aid in huge quantities and generally fall into the "way too optimistic camp". The most optimistic get permanent rotational guest appearances on CNBC. So when a "truth teller" comes along, he/she/I is seen as a doomsdayer ;) I was also sort of smirking at the "economist on economist" sparring within this article - heck, Roubini could be wrong on every prediction from here on out on this crisis and he'll be 99% more accurate than those who lounged in the Kool Aid pool in 2005/2006. But since he does not rely on "mathematical models" in a religious manner he could be looked down upon. Those same models that even last fall, winter, and to this day have people denying there is anything wrong with the economy. Laughable. So read on to hear about Dr. DOOM!
  • On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac. (ok I can end the story there and Roubini get's a Hall of Fame membership)
  • The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market.
  • When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer. (scoreboard?)
  • But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities.
  • He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.
  • Over the past year, whenever optimists have declared the worst of the economic crisis behind us, Roubini has countered with steadfast pessimism. In February, when the conventional wisdom held that the venerable investment firms of Wall Street would weather the crisis, Roubini warned that one or more of them would go “belly up” — and six weeks later, Bear Stearns collapsed. (Kool Aid 0 - Roubini 3)
  • Following the Fed’s further extraordinary actions in the spring — including making lines of credit available to selected investment banks and brokerage houses — many economists made note of the ensuing economic rally and proclaimed the credit crisis over and a recession averted. (where have we heard that before? Oh... last week) Roubini, who dismissed the rally as nothing more than a “delusional complacency” encouraged by a “bunch of self-serving spinmasters,” (oh I need to borrow some of that phrasing - so good Roubini - so good) stuck to his script of “nightmare” events (Kool Aid 0 - Roubini 4)
  • I’m not a pessimist by nature,” he insisted. “I’m not someone who sees things in a bleak way.” Just looking at him, I found the assertion hard to credit. With a dour manner and an aura of gloom about him, Roubini gives the impression of being permanently pained, as if the burden of what he knows is almost too much for him to bear. He rarely smiles, and when he does, his face, topped by an unruly mop of brown hair, contorts into something more closely resembling a grimace.
This is a long story in the Times - and if you are into this type of thing, a great read. But to spare those of you who only want to know how to survive this market or what brand of Kool Aid is best to drink I'll skip along to his current views
  • Though he continues to issue colorful doomsday prophecies of a decidedly nonmainstream sort — especially on his popular and polemical blog, where he offers visions of “equity market slaughter” and the “Coming Systemic Bust of the U.S. Banking System” — the mainstream economic establishment appears to be moving closer, however fitfully, to his way of seeing things.
  • What economic developments does Roubini see on the horizon? And what does he think we should do about them? The first step, he told me in a recent conversation, is to acknowledge the extent of the problem. “We are in a recession, and denying it is nonsense,” he said. When Jim Nussle, the White House budget director, announced last month that the nation had “avoided a recession,” Roubini was incredulous.
  • But most important, in Roubini’s opinion, is to realize that the problem is deeper than the housing crisis. “Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts. All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”
  • Roubini argues that most of the losses from this bad debt have yet to be written off, and the toll from bad commercial real estate loans alone may help send hundreds of local banks into the arms of the Federal Deposit Insurance Corporation. A good third of the regional banks won’t make it,” he predicted. In turn, these bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, (our grand kids) along with all the other debt accumulated by consumers and corporations. “Our biggest financiers are China, Russia and the gulf states,” Roubini noted. “These are rivals, not allies.”
  • Accordingly, he sees the choice facing the United States as stark but simple: either the government backs up a trillion-plus dollars’ worth of high-risk mortgages (in exchange for the lenders’ agreement to reduce monthly mortgage payments), or the banks and other institutions holding those mortgages — or the complex securities derived from them — go under.You either nationalize the banks or you nationalize the mortgages,” he said. “Otherwise, they’re all toast.”
Long term Future?
  • The United States, Roubini went on, will likely muddle through the crisis but will emerge from it a different nation, with a different place in the world. “Once you run current-account deficits, you depend on the kindness of strangers,” he said, pausing to let out a resigned sigh. “This might be the beginning of the end of the American empire.
This is an important point on how he even forecast the U.S. was in trouble
  • The ’90s were an eventful time for an international economist like Roubini. Throughout the decade, one emerging economy after another was beset by crisis, beginning with Mexico’s in 1994. Panics swept Asia, including Thailand, Indonesia and Korea, in 1997 and 1998. The economies of Brazil and Russia imploded in 1998. Argentina’s followed in 2000. Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs. Most of these countries also had poorly regulated banking systems plagued by excessive borrowing and reckless lending. Corporate governance was often weak, with cronyism in abundance.
Does that sound familiar? Of course it could never happen here - we're the United States of Subprime - we are impervious!
  • After analyzing the markets that collapsed in the ’90s, Roubini set out to determine which country’s economy would be the next to succumb to the same pressures. His surprising answer: the United States’. “The United States,” Roubini remembers thinking, “looked like the biggest emerging market of all.”
Last point, economists are heavy drinkers of Kool Aid
  • Recessions are signal events in any modern economy. And yet remarkably, the profession of economics is quite bad at predicting them. A recent study looked at “consensus forecasts” (the predictions of large groups of economists) that were made in advance of 60 different national recessions that hit around the world in the ’90s: in 97 percent of the cases, the study found, the economists failed to predict the coming contraction a year in advance.
But since we're denying there is even a recession because the numbers (government created) say there is none - we are just a big bunch of whiners. So get out there, and spend to support the US economy! (wait, isn't that what got us here in the first place?)

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