Meet the Economist Who Thinks We’re Doomed
|August 23, 2008||Posted by Jeffery J. Smith under Progress Report, The Progress Report|
Meet the Economist Who Thinks We’re Doomed
Geonomists are more accurate but a guy half-right gets more attention
We trim and append this 2008 article from The New York Times of August 15 and posted by AlterNet.
By Stephen Mihm
On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, warned, not for the fist time, that the United States was facing a once-in-a-lifetime housing bust, an oil shock, and a deep recession. His sequence of events: homeowners default on mortgages, trillions of dollars of mortgage-backed securities unravel worldwide, then global financiers quit lending to each other. These developments could cripple or destroy hedge funds, investment banks, and Fannie Mae and Freddie Mac.
In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under, and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust, and the credit crisis deepened. By late summer, the Federal Reserve was making the first of many unorthodox interventions in the economy, including buying up tens of billions of dollars in mortgage-backed securities.
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” — six weeks later, Bear Stearns collapsed. Following the Fed’s further extraordinary actions in the spring — including making lines of credit available to selected investment banks and brokers — many economists made note of the ensuing economic rally and proclaimed the credit crisis over and a recession averted. Roubini, who dismissed the rally as nothing more than a “delusional complacency” encouraged by a “bunch of self-serving spinmasters,” predicted waves of corporate bankruptcies, collapses in markets like commercial real estate and municipal bonds, and the possible bankruptcy of a large regional or national bank. One of these developments has come to pass — the demise last month of the California bank IndyMac, one of the largest such failures in US history.
The US economy in 2004 had a current-account deficit of $600 billion, including the biggest housing bubble in the nation’s history — that began after the Federal Reserve cut rates to close to zero in 2003. Roubini became convinced that the housing bubble was going to pop.
By late 2004 he had started to write that foreign investors would stop financing the federal deficit and abandon the dollar, wreaking havoc on the economy. He said that these problems might manifest themselves in 2005 or, at the latest, 2006. But by the end of 2006, the train wreck hadn’t occurred.
Professional economists are quite bad at predicting recessions. A recent study looked at “consensus forecasts” (the predictions of large groups of economists) that were made in advance of 60 different national recessions that hit around the world in the ’90s: in 97 percent of the cases, the economists failed to predict the coming contraction a year in advance. On those rare occasions when economists did successfully predict recessions, they significantly underestimated the severity of the downturns. Worse, many of the economists failed to anticipate recessions that occurred as soon as two months later.
Econometric models typically rely on the assumption that the near future is likely to be similar to the recent past, and thus are nigh useless for forecasts. Only a handful of 20th-century economists have even bothered to study financial panics. Roubini’s predictions did not make use of mathematical models.
Roubini applauded when the Federal Reserve cut interest rates to 2 percent from 5.25 percent beginning last summer. While he also supported the Fed’s bailout of Bear Stearns, he believes that future bailouts should focus on mortgage owners, not investors.
“Reckless people have deluded themselves that this was a subprime crisis,” he says. But the whole economy is top-heavy with debt.
JJS: Some economists, those appearing in these pages, have forecast far more accurately than Roubini (yet have failed to garner media fanfare):
Fred Harrison, PhD
Dr. Fold Foldvary
Richard C. Cook
Even your editor
What ours do more scientifically is track land prices and the resulting growth in debt for buying sites (usually with buildings on them), which expands roughly every 18 years. Economies are part of the ecosystem and as such, inhales and exhales at a set rhythm, as do other organic systems.
More humanely than most economists, Noriel called for bailing out the bottom, not the top. Even better than a one-time handout for betting wrong would be an ongoing dividend paid to the entire citizenry out of societys surplus, which is all the money we spend on the nature we use. Redirecting that multi-trillion dollar flow into everyones pockets means borrowers could choose: either cover their mortgages or cut losses and spend the social salary on cheaper digs elsewhere.
But because the extra income would come from recovered rents, itd make land useless as an object of speculation. Itd be bought and sold only for current use, keeping its price from bubbling up and homeowners out of deep debt. Instead of boom/bust, the economy would climb/glide. During whatever phase, citizens would get their fair share of natural value, enjoying the wherewithal to withstand any minor tempest.
Jeffery J. Smith runs the Forum on Geonomics.
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