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Editor, The Konformist
From The Sunday Times
October 26, 2008
Nouriel Roubini: I fear the worst is yet to come
When this man predicted a global financial crisis more than a year
ago, people laughed. Not any more...
As stock markets headed off a cliff again last week, closely
followed by currencies, and as meltdown threatened entire countries
such as Hungary and Iceland, one voice was in demand above all
others to steer us through the gloom: that of Dr Doom.
For years Dr Doom toiled in relative obscurity as a New York
University economics professor under his alias, Nouriel Roubini. But
after making a series of uncannily accurate predictions about the
global meltdown, Roubini has become the prophet of his age, jetting
around the world dispensing his advice and latest prognostications
to politicians and businessmen desperate to know what happens next
and for any answer to the crisis.
While the economic sun was shining, most other economists scoffed at
Roubini and his predictions of imminent disaster. They dismissed his
warnings that the sub-prime mortgage disaster would trigger a
financial meltdown. They could not quite believe his view that the
US mortgage giants Fannie Mae and Freddie Mac would collapse, and
that the investment banks would be crushed as the world headed for a
Yet all these predictions and more came true. Few are laughing now.
What does Roubini think is going to happen next? Rather worryingly,
in London last Thursday he predicted that hundreds of hedge funds
will go bust and stock markets may soon have to shut perhaps for
as long as a week in order to stem the panic selling now sweeping
What happened? The next day trading was briefly stopped in New York
Dubbed Dr Doom for his gloomy views, this lugubrious disciple of
the "dismal science" is now the world's most in-demand economist. He
reckons he is getting about four hours' sleep a night. Last week he
was in Budapest, London, Madrid and New York. Next week he will
address Congress in Washington. Do not expect any good news.
Contacted in Madrid on Friday, Roubini said the world economy
was "at a breaking point". He believes the stock markets are
now "essentially in free fall" and "we are reaching the point of
For all his recent predictive success, his critics still urge calm.
They charge he is a professional doom-monger who was banging on
about recession for years as the economy boomed. Roubini is stung by
such charges, dismissing them as "pathetic".
He takes no pleasure in bad news, he says, but he makes his
standpoint clear: "Frankly I was right." A combative, complex man,
he is fond of the word "frankly", which may be appropriate for
someone so used to delivering bad news.
Born in Istanbul 49 years ago, he comes from a family of Iranian
Jews. They moved to Tehran, then to Tel Aviv and finally to Italy,
where he grew up and attended college, graduating summa cum laude in
economics from Bocconi University before taking a PhD in
international economics at Harvard.
Fluent in English, Italian, Hebrew, and Persian, Roubini has one of
those "international man of mystery" accents: think Henry Kissinger
without the bonhomie. Single, he lives in a loft in Manhattan's
trendy Tribeca, an area popularised by Robert De Niro, and collects
Despite his slightly mad-professor look, he is at pains to make
clear he is normal. "I'm not a geek," said Roubini, who sounds
rather concerned that people might think he is. "I mean it frankly.
I'm not a geek."
He is, however, ferociously bright. When he left Harvard, he moved
quickly, holding various positions at the Treasury department,
rising to become an economic adviser to Bill Clinton in the late
1990s. Then his profile seemed to plateau. His doubts about the
economic outlook seemed out of tune with the times, especially when
a few years ago he began predicting a meltdown in the financial
markets through his blog, hosted on RGEmonitor. com, the website of
his advisory company.
But it was a meeting of the International Monetary Fund (IMF) in
September 2006 that earned him his nickname Dr Doom.
Roubini told an audience of fellow economists that a generational
crisis was coming. A once-in-a-lifetime housing bust would lay waste
to the US economy as oil prices soared, consumers stopped shopping
and the country went into a deep recession.
The collapse of the mortgage market would trigger a global meltdown,
as trillions of dollars of mortgage-backed securities unravelled.
The shockwaves would destroy banks and other big financial
institutions such as Fannie Mae and Freddie Mac, America's largest
home loan lenders.
"I think perhaps we will need a stiff drink after that," the
moderator said. Members of the audience laughed.
Economics is not called the dismal science for nothing. While the
public might be impressed by Nostradamus-like predictions,
economists want figures and equations. Anirvan Banerji, economist
with the New York-based Economic Cycle Research Institute, summed up
the feeling of many of those at the IMF meeting when he delivered
his response to Roubini's talk.
Banerji questioned Roubini's assumptions, said they were not based
on mathematical models and dismissed his hunches as those of a
Cassandra. At first, indeed, it seemed Roubini was wrong. Meltdown
did not happen. Even by the end of 2007, the financial and economic
outlook was grim but not disastrous.
Then, in February 2008, Roubini posted an entry on his blog
headlined: "The rising risk of a systemic financial meltdown: the
twelve steps to financial disaster".
It detailed how the housing market collapse would lead to huge
losses for the financial system, particularly in the vehicles used
to securitise loans. It warned that " a national bank" might go
bust, and that, as trouble deepened, investment banks and hedge
funds might collapse.
Even Roubini was taken aback at how quickly this scenario unfolded.
The following month the US investment bank Bear Stearns went under.
Since then, the pace and scale of the disaster has accelerated and,
as Roubini predicted, the banking sector has been destroyed, Freddie
and Fannie have collapsed, stock markets have gone mad and the
economy has entered a frightening recession.
Roubini says he was able to predict the catastrophe so accurately
because of his "holistic" approach to the crisis and his ability to
work outside traditional economic disciplines. A long-time student
of financial crises, he looked at the history and politics of past
crises as well as the economic models.
"These crises don't come out of nowhere," he said. "Usually they
arrive because of a systematic increase in a variety of asset and
credit bubbles, macro-economic policies and other vulnerabilities.
If you combine them, you may not get the timing right but you get an
indication that you are closer to a tipping point."
Others who claimed the economy would escape a recession had been
swept up in "a critical euphoria and mania, an irrational
exuberance", he said. And many financial pundits, he believes, were
just talking up their own vested interests. "I might be right or
wrong, but I have never traded, bought or sold a single security in
my life. I am trying to be as objective as I can."
What does his objectivity tell him now? No end is yet in sight to
"Every time there has been a severe crisis in the last six months,
people have said this is the catastrophic event that signals the
bottom. They said it after Bear Stearns, after Fannie and Freddie,
after AIG [the giant US insurer that had to be rescued], and after
[the $700 billion bailout plan]. Each time they have called the
bottom, and the bottom has not been reached."
Across the world, governments have taken more and more aggressive
actions to stop the panic. However, Roubini believes investors
appear to have lost confidence in governments' ability to sort out
The announcement of the US government's $700 billion bailout, Gordon
Brown's grand bank rescue plan and the coordinated response of
governments around the world has done little to calm the
situation. "It's been a slaughter, day after day after day," said
Roubini. "Markets are dysfunctional; they are totally unhinged."
Economic fundamentals no longer apply, he believes.
"Even using the nuclear option of guaranteeing everything, providing
unlimited liquidity, nationalising the banks, making clear that
nobody of importance is going to be allowed to fail, even that has
not helped. We are reaching a breaking point, frankly."
He believes governments will have to come up with an even bigger
international rescue, and that the US is facing "multi-year economic
Given such cataclysmic talk, some experts fear his new-found
influence may be a bad thing in such troubled times. One senior Wall
Street figure said: "He is clearly very bright and thoughtful when
he is not shooting from the hip."
He said he found some of Roubini's comments "slapdash and
silly". "Sometimes the rigour of his analysis seems to be missing,"
Banerji still has problems with Roubini's prescient IMF speech. "He
has been very accurate in terms of what would happen," he said. But
Roubini was predicting an "imminent" recession by the start of 2007
and he was wrong. "He hurt his credibility by being so pessimistic
long before it was appropriate."
Banerji said on average the US economy had grown for five years
before hitting a bad patch. "Roubini started predicting a recession
four years ago and saying it was imminent. He kept changing his
justification: first the trade deficit, the current account deficit,
then the oil price spike, then the housing downturn and so on. But
the recession actually did not arrive," he said.
"If you are an investor or a businessman and you took him seriously
four years ago, what on earth would happen to you? You would be in a
foetal position for years. This is why the timing is critical. It's
not enough to know what will happen in some point in the distant
Roubini says the argument about content and timing is
irrelevant. "People who have been totally blinded and wrong accusing
me of getting the timing wrong, it's just a joke," he said. "It's a
bit pathetic, frankly. I was not making generic statements. I have
made very specific predictions and I have been right all along."
Maybe so, but he does not sound too happy about it, frankly.