http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html
NY Times Magazine, August 17, 2008
Dr. Doom
By STEPHEN MIHM
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.
(clip)
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.
For months, he has been predicting that the United States will suffer
through an 18-month recession that will eventually rank as the "worst
since the Great Depression." Though he is confident that the economy
will enter a technical recovery toward the end of next year, he says
that job losses, corporate bankruptcies and other drags on growth
will continue to take a toll for years.
Roubini has counseled various policy makers, including Federal
Reserve governors and senior Treasury Department officials, to mount
an aggressive response to the crisis. He applauded when the Federal
Reserve cut interest rates to 2 percent from 5.25 percent beginning
last summer. He also supported the Fed's willingness to engineer a
takeover of Bear Stearns. Roubini argues that the Fed's actions
averted catastrophe, though he says he believes that future bailouts
should focus on mortgage owners, not investors. 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."
For months Roubini has been arguing that the true cost of the housing
crisis will not be a mere $300 billion the amount allowed for by
the housing legislation sponsored by Representative Barney Frank and
Senator Christopher Dodd but something between a trillion and a
trillion and a half dollars. 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,
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."
_______________________________________________
pen-l mailing list
[email protected]
https://lists.csuchico.edu/mailman/listinfo/pen-l
