SPIEGEL Interview with Economist Nouriel Roubini: 'We Will Have Even More Crises in the Future'

Part 2: 'We Have to Starve the Beast'

Banking centers like Frankfurt must submit to fundamental reforms, says Nouriel Roubini. Zoom

Banking centers like Frankfurt must submit to fundamental reforms, says Nouriel Roubini.

SPIEGEL: Is there a script for crises?

Roubini: No crisis is identical but many of them are similar. There is a stage of boom and bubble before the bust and the crash. People will see the value of certain assets like homes or equity go up, then they will use these assets as a collateral for borrowing too much and therefore you have a build-up of leverage in the financial system. And then, once the bubble goes bust, the value of the assets falls and people are stuck with all this debt they can't repay.

SPIEGEL: But how do you recognize a bubble?

Roubini: It's difficult. I get suspicious when people say, this time it's different and this innovation is going to radically change the way we live and work and it is going to lead to long-term massive increase in actual wealth. During the tech bubble there were people writing books with titles like "Dow at 36,000."

SPIEGEL: Currently a lot of money is going into commodities like oil and copper. Is that our next bubble?

Roubini: Possibly. To me it looks like some of it is not due to demand but liquidity chasing commodity. It is one of my major concerns right now: We decided to save the global economy by flooding the world with a massive amount of liquidity. Now we risk making the same mistake as during the last cycle.

SPIEGEL: But what would have been the alternative to stimulus programs and the intervention of the central banks? Leaving it to the markets could have driven the world into a depression.

Roubini: That's true. But we have to be careful not to go down that road for too long. Otherwise we risk creating zombie banks and companies that are kept alive artificially. Also, look what is going on with the banking industry. We started with a too-big-to-fail problem, and part of the policy response to the crisis has been even more financial consolidation. JP Morgan took over Bear Stearns and Bank of America took over Merrill Lynch. What we have now is financial institutions that are even bigger. Those institutions, even more then before, know if they do something dangerous, something reckless, they will be bailed out again.

SPIEGEL: Should the institutions that are too big too fail be broken up?

Roubini: Why not? We have to starve the beast. The official policy approach has been, let's create a resolution regime for an orderly wind down. My concern is: How do you, in an orderly fashion, close down a globally operating financial institution like Goldman Sachs or Morgan Stanley in the heat of the next crisis? It is too risky, and in the end it would be: Let's bail them out again.

SPIEGEL: But how do you determine who is too big to fail?

Roubini: If I had to think about the parameters that define a systemic important institution, certainly the size of assets and liabilities as a share of the financial system and the GDP are relevant. Certainly the amount of leverage and liabilities not only on, but also off the balance sheet are important. And how crucial that institution is in the clearing and payment system is also important. At the end of the day, it is not too hard to figure out which ones they are.

SPIEGEL: US President Barack Obama has introduced plans for financial reform, including the so-called Volcker rule and other regulations to limit the size of banks. Is more drastic regulation needed?

Roubini: It's a good start, but I am thinking in a more radical direction. The financial supermarket model obviously has not worked. An institution where you have, all in one place, commercial banking, investment banking, hedge funds, insurance and lots of other financial services becomes too complex to manage. No CEO can effectively monitor that. So, this all needs too be broken up into pieces. If you have many different institutions which do different types of financial services, none of them will be systemically important.

SPIEGEL: Almost 100 years ago, the US government broke up Standard Oil -- and the world ended up with pieces that became bigger than the original.

Roubini: What I am proposing goes back to Glass-Steagall Act types of restrictions between commercial and investment banking, regulations that already existed until about 10 years ago. They worked well.

SPIEGEL: What additional financial reforms do you consider indispensable?

Roubini: The derivative markets have to become more transparent, and securitization has to be more strictly regulated. Financial institutions need to change their compensation systems in a way that they don't lose sight of long-term interests. And the rating agencies need to be forced to change their business model so conflicts of interest are no longer an issue.

SPIEGEL: Unfortunately, it seems rather utopic right now for very far-reaching reforms to be pushed through.

Roubini: I don't expect that my views are going to be implemented during this crisis. We might have to wait until the next one, until more radical proposals will be considered. My worry is that if we don't create a system where these crises occur less frequently, then the backlash we have seen in recent times against market oriented economies, against reforms, against globalization, against free trade, could become more severe the next time around. The lesson is actually if another crisis were to occur down the line, it's going to be even more virulent then the last one, even more damaging and costly for any measure you want to look at, income, jobs, wealth, fiscal costs. We just can not afford that.

SPIEGEL: Your reform proposals are derived from the current crisis. Will they also work for avoiding any kind of future financial crisis?

Roubini: We can not make crises disappear entirely. But if we can make them less frequent, less virulent, that will already be a success.

Editor's. Note: This interview was conducted before the European Union and the International Monetary Fund agreed on a €750 billion package to shore up the euro in the early hours of Monday morning.

Interview conducted by Thomas Schulz and Alexander Jung

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1. It is clear that the system is becoming increasingly unstable
Norberto_Tyr 05/11/2010
The system as imagined by Adam Smith was inherently unstable, it looked stable for one simple reason, the size of the world allowed to compensate local instability by affecting people that were by definition placed outside of the overall economic system. Take for example the black slaves exploitation, the market seemed to work following the offer and demand 'law', the most efficient gained control of the commodities markets of rice, cotton, rubber, poppies, coal, et cetera, and, of course, the poor slaves did no counted at all, we cannot continue hiding dirt under the Persian carpet. At the present the ‘economical’ system has become a true zero-sum game; on the other hand, the ethical system is totally bankrupt. How we explain all currencies collapsing at the same time, no credit but rates at a record low level, stock markets rocketing to the moon and ‘stable’ CPI, rating agencies teaching companies how to improve their ratings, and the list of obvious inconsistencies continues indefinitely. The problem is that we see a bush that has no trees. It looks like a bush and everyone assumes that is made of trees, but not, it is a mirage, there are no trees at all. 1- the myth of the public company: the myth goes on the lines that companies are ‘managed’ by shareholders through the board. False. Companies, regardless of the number of shareholders, are managed by two or three people at the most, and if their interests coincide with the ones of the majority it is by pure chance; 2- the myth of accrual accounting: accrual in itself is a bit out of limits from legality, very close to usury, part of creative accounting, and very difficult to scrutinize even in the best case scenario, which is by far not the one we have at the moment, in which debtor and creditor are real persons perfectly identified. Enron, Bond, Adler, the new Cash Flow account requirement, and the Sarbanes-Oxley ‘kerfuffle’ prove that I am right; accrual accounting is close to theft. 3- the myth of public company valuation (by books or by capitalization) plus good will vaporware: the duplicity of rating agencies, the ‘stimulating’ effect of the public companies on the overall economy, the Ltd scam, the implicit ‘knowledge’ of the market, the freedom of the press, and all that ancient Greek mythology. Lets be frank, the share market is mere gambling, people spend the same time to pick a share, a horse, or a lottery ticket; some people have their copyrighted ‘cabalas’ like Warren Buffet, and some are better than others implementing them, but at the end of the day be sure that it is mere gambling. For this reason I am extremely skeptical on the ‘corrections’ imposed by governments on this regard. The only solution is to stop gambling. 4- The myth that risk and profit counterbalance themselves: well, Funny Mae plus toxic assets debunked this myth very easily, in fact there is a strong indication that apparent high risk strategies are the safest and most profitable, and its corollary is true, safe investments could be deadly risky and les profitable. In short, there is no relation between risk and profit, it is a mere alibi to morally justify immoral profits, the truth is that the greater the amount of money a person can bet, less risk is involved and higher profits are obtained. Money can flow to media, rating agencies, and even dishonest government officials and politicians as well. 5- Governments ignore the fact that single individuals can move markets and even compete with countries. The famous tale that Soros betted against the Pound and won is well known, it did not verify this but I subscribe to it. I do know that Soros was buying large tracts of land in Argentina and elsewhere using the ‘public company’ umbrella, which should be deemed illegal. Then, governments must think how to deal with this super mini powers (ultra millionaires that could not spend their money in one million years), nevertheless they treat them as ‘normal citizens’ with the same rights as Doña Clotilde drinking tea and eating scones at home while her husband is at the factory line. Governments must do the same as I do, namely asking: what are you going to do with such awful amount of money? 6- And finally we must consider that if every civilized country ‘grow’ at least 3 % per year the world resources will not last long. From the above analysis we conclude that the best and most sustainable strategy is to abolish the concept of ‘public company’ since anonymity is the mother of all problems, injustice and tricks. Companies must have obvious, clearly identified and legally responsible owners. This will reduce the scale of them, it would make the owners more accountable, reduce tax evasion, will diversify wealth, and stamp-out the anonymous impunity in which a few well-organized people are indulging at the moment at the expense of our people and resources. And the stock markets? What markets are you talking about...? Norberto
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Nouriel Roubini
Nouriel Roubini is considered the prophet of the financial crisis. Four years ago, he was one of the first to warn that banks and national economies could be in for trouble. Roubini, 52, was born in Istanbul to a Jewish-Iranian family before growing up in Iran, Israel and Italy. Since 1995, he has been an economics professor at New York University. In addition, he operates a consulting firm of 80 employees, which provides financial analysis to clients in the finance industry.

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