Thursday, October 9, 2008

He told them so

Steve Mihm, an associate professor of economic history at the University of Georgia, wrote something very interesting in the New York Times on August 16, 2008.

"On September 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.

"(Roubini) laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unravelling worldwide, and the global financial system shuddering to a halt. These developments, he said, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fanny Mae and Freddie Mac.

When he finished, the moderator of the event said, "I think we will need a stiff drink after that… People laughed, not without reason. At the time, unemployment and inflation were low, and the economy, while weak, was still growing despite rising oil prices and a softening housing market."

We all know what happened. In 2007, subprime lenders began filing for bankruptcy, and the dominoes began falling. But here’s more:

"Over the past year, whenever optimists have declared the worst of the US economic crisis over, 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.

"After 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. Roubini stuck to his script of ‘nightmare’ events: waves of corporate bankruptcies, collapses in markets like commercial real estate and municipal bonds and, most alarming, the possible bankruptcy of a large regional or national bank that would lead to a panic by depositors. Not all of these developments have come to pass, but last month’s demise of the California bank IndyMac – one of the largest such failures in US history – drew only more attention to Roubini’s seeming prescience.

"As a result, Roubini, a respected but formerly obscure academic, has become a major figure in the public debate about the economy: the seer who saw it coming. He has been summoned to speak before Congress, the Council on Foreign Relations and the World Economic Forum at Davos, Switzerland. He is now a sought-after adviser, spending much of his time shuttling between meetings with central bank governors and finance ministers in Europe and Asia."

But there is more "prescience" from this Iranian Jew who was born in Istanbul 52 years ago:

"Reckless people have deluded themselves that this was a subprime crisis, 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 Corp. ‘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 most 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."

So, is this the end of Pax Americana? And is it the beginning of Pax Cinensis? Exciting, though perilous times we find ourselves in.

And all this unravelling is happening in all its naked gore as America makes a historic decision, whether to muddle through in the company of a curious mix of neo-cons, neo-liberals, bible-toting evangelicals, dyed-in-the-wool conservatives and the so-called WASPs (White, Anglo-Saxon Protestants) with its racist fringe, accompanying a McCain-Palin ticket, or to take a leap of faith with a Kenyan-American bred in Hawaii and Indonesia and the warrens of Chicago, with his message of change.


Now for a light postscript:

How do you define an "economic slowdown"? Answer: When your neighbour loses his job.

How do you define an "economic recession"? Answer: When you yourself lose your job.

What about "economic recovery"? Answer: When the chief economist loses HER job.