Nouriel Roubini: August 2006 Predictive Blog Posts; 2008 Interview with Charlie Rose

"The Biggest Slump in US Housing in the Last 40 Years"...or 53 Years? - Nouriel Roubini 8/23/06

Eight Market Spins About Housing by Perma-Bull Spin-Doctors...And the Reality of the Coming Ugliest Housing Bust Ever....

"Then, whether this housing bust will lead to a recession or not is the only remaining uncertainty: Krugman himself does not yet share my “certainty” - as he puts it – about a recession but, short of that certainty, he is fully of the view that the housing bust will be “ugly” and has some risks of triggering a broader economy-wide recession. So, the “Shrill Order of the Reality-Based Reputable Eeyores” is growing by the day and I am proud to be in company of such distinguished academic and non-academic colleagues." -Nouriel Roubini 8/26/06

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Nouriel Roubini's Global EconoMonitor (Blog)

A Conversation with Nouriel Roubini (Charlie Rose, 10/14/08)



(Nouriel Roubini is an economics professor at New York University.)

I thought I'd provide a partial transcript of this video clip for readers who might be hearing impaired. (I will be activating a blog-reader on this blog soon.)

Charlie Rose:
"Where are we now in this continuum of this huge financial crisis?"

Roubini:
"The recession will last at least two years.... there will be hundreds of banks going belly up. ...What we've done is avoiding a more severe catastrophe, a disaster. But still, it is going to be very, very painful for the real economy and for financial markets. We haven't reached the bottom yet."

"We discovered that the most sophisticated financial system in the world was totally fragile. Because we created an actual system where there was not proper rules, proper institution, proper supervision, and regulation. The ideology in Washington for the last 8 years regarding the financial market has been self-regulation."

"Self-regulation is meaningless. It means no regulation. It was an ideology based on market discipline, but there was no market discipline, because when there is mania, when there are bubbles, and when there is excitement, and nobody is worried about the risk."

There was a reliance on internal risk management. But the previous CEO of Citi said, when the music is playing, you've got to dance.. so everybody is taking risks...So nobody's listening to the risk managers.

"And then there was a reliance on the rating agencies, that were being paid by the people they were supposed to rate. So the conflict of interest was huge. So we created a financial system that without proper rules and regulation, like the law of the jungle...you have periods of time when there is bubbles, there is manias, and then there is panic and fear. And you go from one to another, from boom to bust."

"That's why you need an appropriate system of regulation and supervision of banks, of hedge funds, of broker-dealers, of other financial institutions. Without it, its going to be a disaster. Excessive amounts of financial innovation, if not controlled and contained, is very risky..."

Charley Rose:
"When did we last have a chance to avoid this?"

Roubini:
"We missed the chance a few years ago...3 months ago, the damage was done. (July of 2008) Even a year ago, the damage was done. At this point, the mistakes were done a few years ago, you know, the feds cut rates. They kept them too low for too long, there was no supervision or regulation of toxic mortgages and other credit, the entire ideology was one of laissez-faire, so we really created the biggest bubble in the US housing market."

"And it was not just one of the sub-prime mortgage problem. The same kind of excess was in subprime, in near-prime, in prime, in home equity loans and in commercial real estate, credit cards, auto loans, student loans..leveraged loans that financed LBO's that should have never occurred, excessive borrowing by the state and municipal governments, the muni-bonds that have been thrattled, commercial loans, corporate bonds, all this creation of credit ...that is going to blow up right now."

"So we created a really huge mess, because we didn't properly regulate the financial system."

Charlie Rose:
"Why this insight that you had...and why so few people?"

"I think I was right, because I've been studying financial crises for over two decades, I've written books about them, I was involved in policy making for a few years."

"...There are lots of good analysts on Wall Street, but there is all this bias of sell-side research. When your firm is underwriting stocks and bonds and securities, you can not be sticking your neck out and saying we're going to have a recession...So I think that many of the professional forecasters have this bias coming from their institution."

"And you don't have enough independent thinkers and scholars who are willing to speak the truth. But I was not the only one. Mark Schiller, and many other ones...about the housing bubble. I think some of the academics were out there realizing that this was a very severe risk."

"...You have to make sure that you separate the banks that are illiquid, but solvent, and that can be recapitalized, from those that are essentially insolvent, the sooner you shut them down, the better, otherwise they will take the deposits and make other risky loans, and it will be a disaster. That needs to be done. "

"On top of it, now we are going into a severe recession. Demand is falling, consumption by consumers is collapsing. Investment demand by corporation for new capital is also collapsing. And if the private sector is not going to spend, we need a major fiscal stimulus program, something on the order of 300 billion dollars."

"Roads, infrastructure, giving money to state and local governments, energy...otherwise, six months from now, we might try to rescue the financial system, but if the column is going to collapse, those delinquencies, those credit loses are going to mount, and therefore, anything we do to fix the financial system is going to be undone by a very severe recession. So we need to stimulate growth through fiscal expansion."

"The other problem is that the bad bank loans are also the debt of the housing sector, yet
millions of house are now on the verge of bankruptcy..people at risk for losing their homes, being foreclosed."

"Therefore you have to reduce the face value of this debt. That was what was done during the Great Depression. We created the Home Owners Loan Corporation that bought all this bad assets from the banks, reduced the face value, and refinanced home owners into longer term fixed rate mortgages that they could afford."

"If we had don't avoid this tsunami of foreclosure, consumption is going to keep on falling, because people don't have money to spend, because they are buried under a mountain of debt, and the recession is going to become more severe. And these foreclosures are going to dump more homes on the market, and push down even further home prices."

"A third of all sales today are either foreclosures or short sales. So they are distress sales, not real sales. So we really have to do a lot more to prevent this financial crisis from becoming a more severe economic crisis."

Well said!