| Crisis Economics: A crash course in the future of finance Penguin Press By Nouriel Roubini and Stephen Mihm $27.95 |
By Leah Spiro
Nouriel “Dr. Doom” Roubini is a superstar economist with a stellar calling card. In September 2006 the New York University professor publicly predicted an imminent housing bust and deep recession. “Crisis Economics” looks back at the flawed thinking that prevented the world from anticipating the crisis, argues that the world shouldn’t have been so surprised, and offers solutions to avoid another one.
Crises are an entirely predictable part of capitalism, yet they are treated as astonishing anomalies, says Roubini.
Roubini’s bleak conclusion: The 70-year period of economic stability after the Great Depression has ended unless we can figure out how to fix the global economic system. If we can’t, what’s next is what he calls “the Great Instability,” a period of more frequent, more serious crises.
Like a few in Congress (and former Federal Reserve chairman Paul Volcker, an advisor to President Barack Obama), Roubini wants to bust up the big banks. They are too massive, mysterious, interconnected and wield too much political power for regulators to control, says Roubini, who thinks that Goldman Sachs and Citigroup should be dismembered, as well as Bank of America, UBS, Wells Fargo, ING, RBS, Dexia, JPMorgan Chase, BNP Paribas and others. He has a special antipathy for Goldman, which he calls “the world’s largest hedge fund.”
Interestingly, Roubini views actual hedge funds more positively, saying that only hedge funds should be allowed to do proprietary trading, since they are outside the government’s safety net. His only caveat: Hedge funds would have to get long-term funding instead of relying on short-term borrowing from banks and other financial institutions. How this would work is not explained.
The book begins with a nod to Roubini’s prescience by co-author Stephen Mihm, an associate professor of history at the University of Georgia. The victory lap out of the way, Roubini moves on to his “white swan” thesis: “In the history of modern capitalism, crises are the norm, not the exception.”
In 2008, however, many had been seduced into thinking that crises were black swan events, a term popularized by Nassim Nicholas Taleb, who defined the black swan as extraordinarily rare and unpredictable.
Dr. Doom advocates what he calls crisis economics, or “the study of how and why markets fail.” Part of the problem is that mainstream economics is obsessed with showing “how and why markets work—and work well.” Instead, Roubini suggests that people study such economic theorists as Adam Smith, Karl Marx and John Maynard Keynes, as well as those who specifically focused on financial crises, such as Joseph Schumpeter and Hyman Minsky.
Roubini argues that the incestuous relationship between financial institutions and the government fostered the crisis, and the main reason he wants to break up banks is to curtail their political power. He also predicts that, as a result of banks’ clout, any financial re-regulation this year probably will fall short of what is needed. Certainly Washington won’t be reinstating the Glass-Steagall Act to create a “compartmentalized, sanitized and boring” financial system, as he recommends. His final chapter suggests what we will have in store as a result: more crises, another recession, social and political instability, the return of inflation in 2012 and another carry trade-fueled asset bubble.
Roubini has written a polemic that favors a far bigger role for the state in overseeing finance. Some may think he goes too far, but the financial world needs more provocateurs like Roubini who have the moxie to disparage the conventional thinking, attack powerful institutions and espouse radical ideas. One of a new breed of celebrity economists, Roubini continues his victory lap, with a cameo in the upcoming sequel to the movie “Wall Street.” With a thriving economic research business, Roubini Global Economics, and a book on the bestseller lists, this peddler of doom may well get the last laugh.
