Tuesday, September 14, 2010

Roubini's prophet motive

CNBC often plays disco music when New York University’s party-boy economist Nouriel Roubini appears on air. And why not? The man earned the moniker of Dr Doom for his pessimism about the world economy when other economists were busy heralding a new financial age. Not surprisingly, when the recession happened, Roubini was belatedly hailed as a prophet. As the Portfolio magazine said of him, “Ridicule turned into respect, not to mention countless television appearances, speaking engagements, invitations to testify before Congress, new clients for the consulting firm he runs, and parties packed with young, beautiful admirers.”

The reason for a lengthy introduction of Roubini, an Iranian-Jewish, is his new book is as much about his analysis of the financial future that beckons the world as about himself (more on that later). Written along with Stephen Mihm, a University of Georgia historian, the writers spill a lot of ink to either hark back to the halcyon days of the post-War era or give an overview of the key factors that led to the 2008 financial crisis. Roubini and Mihm spend the second half of the book discussing financial sector reform and key aspects of global trade imbalances. Drawing on the parallels from many countries and centuries, right from the 17th century tulip craze to Japan’s Lost Decade, the writers show that financial cataclysms are as old and as ubiquitous as capitalism itself.

The writers found a possible solution to grapple with the inherent instability of the global financial system in the thinking of economists as varied as John Maynard Keynes and Joseph Schumpeter. “Indeed, the successful resolution of the recent crisis depends on a pragmatic approach that takes the best of both camps, recognising that while stimulus spending, bailouts, lender-of-last-resort support, and monetary policy may help in the short term, a necessary reckoning must take place over the longer term in order to achieve a return to prosperity.”

If books on recession are a genre in themselves, then Crisis Economics would wear out its welcome even with the most tolerant genre buff because the writers take just too long (three-fifths of the book precisely) to deal with the book’s subtitle. And even those predictions (“outlooks” as the book says) are not transcendental. Sample these: “exploding fiscal deficits may prompt some countries to default on their debt, or to resort to the printing press to mitigate it, triggering the sort of high inflation last seen in the 1970s”, “Japan might return to deflation and near-depression, triggering a major sovereign debt crisis”, “China faces growing risks: its investment-led recovery could lose steam, possibly triggering a rise in non-performing loans and, ultimately, a banking crisis”, “no double-dip recession”. Did Roubini write this book with his left hand?

Also, the thesis that asset bubbles and ensuing crises are part and parcel of capitalism isn’t new and is explained in a more articulate fashion in Kenneth Rogoff and Carmen Reinhart’s 2009 book This Time Is Different: Eight centuries of Financial Folly (the book is referenced in Crisis Economics too). The much talked about thoughtful reforms that the book purports to suggest are middling at best: breaking up the banks and more reforms of the International Monetary Fund.

One look at the book cover and you would know that Mihm’s name in smaller font size gives him a direct entry into the pantheon of greatest sidekicks who include Sancho Panza. Roubini jumped onto the Dr Doom gravy train that even if the economy were to rebound, there is more to him than the one-time doomsday scenario that he predicted. Thus comes this book where Roubini seems to have conjured it up by swallowing an entire dictionary of economic terms. Swathes of text are dedicated to explain as to how “credit default swaps” and “mortgage-backed securities”, once obscure expressions, have now become household terms, even if their exact nature remains mysterious. Roubini’s glibness (explaining what assets and liabilities are is being borderline lazy) in the first half of the book sets in such weariness that he comes across as a one-trick pony who acts in every page as if he’s discovering the trick for the very first time. Having said that, this book is highly recommended to those who have been living under a rock since circa September 2008. Those few can suck out the maximum juice.

If anything, the prose, which seems like a love progeny of Economist and John Le Carre, redeems the book. Roubini is a brilliant quote hanger and that can be seen from the disparate quotes that he peppers his arguments with, to a good effect. But then, that’s it. I’m sure, some would argue that the ability to raise money is just as important as the ability to write well or frame a shot. While that may seem to be nonsense, Roubini’s book got me terrified that it might be true.

Earlier this year, when the Eyjafjallajokull volcano started blurting cinders as if it was the world’s biggest broken toaster, people couldn’t fly in Europe at all and had to go back to boats. Roubini doesn’t have an equivalent situation to see through this financial disaster. An argument that the United States must use the recent crisis as an opportunity to make deep and meaningful reforms to its financial system only affirms that at heart Roubini remains a permabear.


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