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Nouriel Roubini * A Conversation with Nouriel Roubini


From Business Week:

One of the most prominent voices of the financial crisis has been Nouriel Roubini, the New York University economist and chairman of economic consulting firm RGE Monitor. Credited with predicting the housing and financial crisis that crescendoed last fall, his outlook has remained consistently bleaker than those of many other economists, but so far he has often been borne out. As he is fond of pointing out lately, the International Monetary Fund recently revised its estimate of global and U.S. bank losses upward to figures similar to his own.

I sat down with him (and the Washington Post’s national economy correspondent, Neil Irwin) on Sunday afternoon, to talk about securitization, the Federal Reserve and the big banks.

The economy:

Roubini says he doesn’t see much in the way of “glimmers of hope” other economists have noted. Unemployment, capital investment, and exports are all worsening, and while there are a few signs of stability in housing, it’s not much. Overall, he figures, the odds of a prolonged “L-shaped” depression have fallen to less than 20%, from about 30%, thanks largely to the efforts of this administration and, to some extent, the last. He expects global contraction of 2% this year, and expansion of about 0.5% next year, “so small it’s going to feel like a recession still.”

Still, he adds: “I don’t worry as much as six months ago about a near depression.” From the man who has been called Dr. Doom – or, as he prefers, Dr. Realistic – that’s practically cheery. (More at RGE Economonitor.)

On securitization and the TALF: While lending has improved somewhat, Roubini doesn’t credit the Federal Reserve’s Term Asset-Backed Loan Facility. A “reasonable idea” in principle, he says, the funds it has lent to subsidize the purchase of securitized consumer credit “is too small to make a difference.” Moreover, demand from securitizers has proven lower than some expected, either because of the fear of complications from after-the-fact congressional meddling, or because there’s simply too little demand for new lending.

He does see securitization returning in time, likening the metastasized securitization state of the pre-crisis market to the junk-bond market’s go-go days. “I don’t think we’ll go back to what it was,” he says. But “now we’ve gone from too much to zero.”

On Ben Bernanke’s Federal Reserve: After underestimating the depth and impact of the housing slump, mistaking the subprime crisis as a niche problem, and failing to seek legislation to dismantle failing banks after Bear Stearns’ collapse last spring, the Fed “has done a lot right,” Roubini says. “Now that the stuff has hit the fan, they have become much more aggressive about doing the right thing.”

Still, he’s not pleased with the Fed’s role as a back-door financier for the rescue effort. It’s understandable that the government has turned to the Fed, since early missteps led the public to see the effort as a bail-out of Wall Street bankers, which in turn has left Congress unwilling to open the purse strings. Still, using the Fed is “a way of bypassing Congress,” Roubini says. “I don’t think it’s a proper process. In a democracy, if you have a fiscal cost, you should do it the right way.”

On the banks: Roubini has publicly scoffed at the bank stress tests, arguing that the real world’s grim metrics are on course to surpass the assumptions made under its “stress-case” scenario, and soon.

And he’s not impressed by the argument that some banks have been run so much better than their peers that they can better withstand the storm. In the end, the loan portfolios of the top four banks aren’t different enough to make much of a difference, he says. “I think the macro trumps everything else.”

With a capital hole for the industry that “could be really, really huge,” he expects the administration to have to make some tough choices. “Forbearance and time can heal many wounds,” he says. But “some institutions may be so far beyond the pale, even time is not going to heal their wounds.”

For those, Roubini advocates injecting enough capital to support them, even if it means taking a majority stake, and then dismantling them. Yet the administration has ruled out nationalization as a tool. “Based on my conversations, I think hey haven’t changed their minds,” says Roubini, who talks periodically with White House economic adviser Larry Summers and Treasury Secretary Timothy Geithner, with whom he worked during the Clinton Administration. “Eventually you have to think along these lines.”

For the healthier banks, the Public-Private Investment Program could do the trick. “It’s not the worst way to do it, it’s not perfect,” Roubini says. “I’ve been more sympathetic to it than other people.”

On swine flu: Roubini said when we spoke that it was too early to tell just how serious the economic impact could be if swine flu spreads rapidly. "The last thing we need is that," he said. "Getting out of everything else is going to be hard enough."

http://www.rgemonitor.com/blog/roubini/256661/a_conversation_with_nouriel_roubini