Stormcrow Economics
With so much to blog about at the moment, I don’t know where to begin. However, I couldn’t let this one slip past without a link. The New York Times has just profiled (the indispensible) RGE Monitor’s Nouriel Roubini. Roubini, a notorious pessimist, is now, much like The Black Swan author and career contrarian Nassim Nicholas Taleb, lauded where he was once obscure for predicting to a large degree the current financial crisis. The NYT calls him “Dr Doom”, but Roubini is more like Hyman Minsky or Keynes, an economist trying to understand what happens when the past doesn’t resemble the future. His diagnosis of the current crisis draws on his work with emerging market financial crises in the ’90s. The common denominator Roubini identified was large current account deficits, financed by “borrowing from abroad in ways that exposed them to the national equivalent of bank runs”. Roubini has watched with trepidation the same dynamic at work in the US for the last few years — a position that he ironically describes as more realist than pessimist, because “things are turning out even worse than I initially predicted.”
For the US though, the future Roubini sees is undeniably bleak,
“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, 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.”
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.”
