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

First came the real estate crisis. Then the financial system melted down. And now, skyrocketing public debt is threatening entire countries. Star economist Nouriel Roubini tells SPIEGEL that more crises will come and go before world leaders agree on true reform. He says breaking up huge banks would be a good place to start.

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

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

SPIEGEL: Professor Roubini, you have a cameo role in the upcoming sequel of the movie "Wall Street." Who are you playing?

Roubini: I'm playing myself. But it's just a small role. There is a scene right after Lehman has collapsed where I'm being interviewed as "Dr. Doom," worrying about the global financial system.

SPIEGEL: We understand you also acted as a consultant for Oliver Stone, the director of the movie?

Roubini: I was not a formal consultant, I just helped him with some advice. We met on a couple of occasions and he asked me about the financial crisis. He also came to a social event with clients of my firm; he wanted to meet hedge fund managers. I came rather accidentally to my role in the movie as "Dr. Doom."

SPIEGEL: You got your nickname, of course, because you were predicting the financial crisis at a time when many other economists were still full of optimism. Are you still pessimistic about the future of the global economy?

Roubini: First of all, I'm not a perma-bear. I am not always negative about the future. Rather, I want to assess the situation correctly. But if I look at the economic picture of the world now, I still see plenty of dark clouds.

SPIEGEL: According to the International Monetary Fund, economic activity is picking up again with forecasts of 4 percent growth this year. Isn't this cause for Dr. Doom to surrender to Dr. Boom?

Roubini: I'm a realist. I can only see a few bright spots in some countries like China, India or Brazil. But the rest? The US economic recovery has been anemic, Japan looks comatose, and Europe is facing a double dip. The Continent is vulnerable to falling back into recession. Even before the Greek shock, the outlook was rather moderate, but now euro zone growth is closer to zero.

SPIEGEL: What do you think about the dangers presented by Greece?*

Roubini: Today the markets are very worried about Greece, but that's only the tip of the iceberg. Increasingly, bond market vigilantes have woken up in places like the UK and Ireland. Even the US and Japan will have problems because of their huge budget deficits. Maybe not this year, but they will eventually. In the US, states like California, Nevada, Arizona, New York and Florida have immense fiscal problems. The growing budget deficits and the huge government debts are really what worry me most.

SPIEGEL: Is it really the right thing to do for the IMF and the EU to help out Greece with €110 billion?

Roubini: That is only kicking the can down the road for a year. I am afraid that Greece, more likely than not ,isn't just illiquid, but insolvent. And providing an insolvent country with money and forcing it to make painful cuts isn't going to do it. Even if taxes are raised and spending is cut, Greece won't necessarily become more competitive. On the contrary, output might fall, unemployment might rise and market share will be lost. We need a plan B.

SPIEGEL: What should that plan B look like?

Roubini: It is necessary to start with a pre-emptive debt restructuring. We have to find an orderly solution for debtors and creditors. And we also need to work out fiscal adjustments for other euro zone countries like Portugal or Spain.

SPIEGEL: Do you think the German government would agree to that? German banks would have to come up with billions once again.

Roubini: Indeed, more than €300 billion of Greece's public debt is held by non-residents, mostly financial institutions from Germany, France and Switzerland. They will have to forego a part of that. Too much time has already been lost by ignoring the Greek crisis. Without such a plan B, if Greece collapses in a disorderly way then the domino effect hitting Spain, Portugal and other parts of the euro zone could be very rapid and dangerous. Eventually, this could lead to a destruction of the monetary union.

SPIEGEL: Did German Chancellor Angela Merkel make things worse by not reacting fast enough to the crisis?

Roubini: Yes, the EU wasted several precious months in designing a support package for Greece in part because of German political resistance to such a package. Domestic German politics and growing skepticism about European monetary union led to a delayed policy response that damaged the efforts to contain the Greek crisis and prevent it from infecting other parts of the euro zone.

SPIEGEL: Was monetary union a mistake?

Roubini: I wouldn't go that far. But it might have been a mistake to allow so many countries in so early. A smaller core of countries that are economically more homogenous, fiscally more sound and committed to structural reforms would have made for a more successful monetary union. The trouble is, once they are in there is no exit without causing a lot of damage.

SPIEGEL: Today, it's a debt crisis. Before that it was a banking crisis. And before that a real estate crisis. Must we get used to constantly being hit by new crises?

Roubini: I am afraid so. In my new book, I show that crises are part of capitalism's DNA. They are not the exception but rather the rule. Many elements vital to capitalism, like innovation and risk taking, also trigger frequent collapse. And what we just went through could get much worse in the future.

SPIEGEL: You make it sound as though crises were inevitable.

Roubini: They are not inevitable. But if you look at history, you will see patterns repeated -- such as excessively loose monetary policy, leveraged vulnerabilities and weak regulation. And we will see them again. Probably we will have even more crises in the future.

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Norberto_Tyr 05/11/2010
1. It is clear that the system is becoming increasingly unstable
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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