January 23, 2009
Nouriel Roubini

Ipek Cem’s guest this week is economist Nouriel Roubini, otherwise known as Dr. Doom for his pessimistic views on the global economic crisis. In this candid interview, Roubini will illuminate on the state of the U.S., European and emerging market economies as well as offer advice on better management of the crisis.

Ipek Cem: My guest today is economist Nouriel Roubini, otherwise known as "Dr Doom". Welcome to Global Leaders.


Nouriel Roubini: Pleasure being with you, today.


Ipek Cem: You know, your name comes up very often when we talk about the global economic crisis. You have been very fast in recognising it. In fact you have recognised it for a long time. What were the first signs, and when was it that you started paying attention?


Nouriel Roubini: Well, it was about the summer of 2006 that I saw this huge asset bubble. The value of homes in the U.S. had doubled the price in ten years, and in my view that was not sustainable. There was too much households borrowing money, spending it. You know, the U.S. consumers were using their homes as like a ATM machine, borrowing against it, and not having positive savings. There was all this build up of that and leverage of financial institution. So I saw a housing crisis coming, and this housing crisis will lead then to a banking crisis, and then to a reduction of credit, a credit crunch. And those things with the weaknesses of the U.S. consumer, and high oil prices will tip the economy into a recession, and the financial system in a crisis. So these were the excesses that I saw.


Ipek Cem: How deep into the crisis do you think we are? Are we at the bottom of it?


Nouriel Roubini: No. In my view the economy is going to keep on contracting in the U.S. and in advanced economies all the way through the end of this year. So the economic contraction, recession, is going to be at least until the end of this year, and then the record of growth is going to be weak even in 2010, so there will be positive growth, but not very strong, and in the financial system the losses are going to continue for a while so we are not yet at the bottom. We are still in a period of economic and financial contraction.


Ipek Cem: You mention in your writings and where you are quoting that this is going to be the longest recession since about 60 years, since the Depression. Could it turn into a depression?


Nouriel Roubini: Well, there is a risk. There is some probability that instead of being just a long and protracted "U", it may end up like an "L". Like what happened, not in the Great Depression, may be more like Japan in the 1990s – Japan after the bursting of their real estate and stock market bubble had ten years of almost no growth and deflation. So the risk of that is still a positive risk, and unless we do the policies that are going to get us out of this problem – easy money, spending money by the Government, fixing the financial system, cleaning up the banks, reducing the debts of households who cannot pay their mortgages and credit cards. A lot of work needs to be done, so there is a risk we end up like Japan if we don't do the right things. Hopefully the policy, from now on, is going to be better and faster, and stronger.


Ipek Cem: And now that you mention it, there is a new President Elect in the U.S., and it's been an interesting transition period, and a lot of expectations are set on the new President and his economic team. How do you evaluate his choice for the economic team?


Nouriel Roubini: Well, I find his economic team really excellent. He has chosen people like Tim Geithner, Larry Summers, and others that understand policy, the market, the economy, and they are committed to do more and to be more aggressive to tackle all the problems we are facing. So both the President and his economic team are really strongly committed to do it, and I believe they are going to be more aggressive in terms of trying to fix the problems. The problem is that even the best team and the best programme takes time to implement, and the recession train has already left the station. Recession started a year ago, in my view, even if you do everything right, we cannot avoid the recession is going to continue until the end of this year, but there is light at the end of the tunnel, but it is towards 2010. This year is going to be difficult.


Ipek Cem: You know, talk of bail-out plans, and lots of bail-out plans around the globe, more famously is the 700 billion bail-out plan, then the plea of the U.S. automotive sector, and several large financial institutions such as Citibank. But this bail-out plans, is it like giving alcohol to the alcoholic? Is it fixing the problem? Is it buying time?


Nouriel Roubini: It depends if you do it right. In my view, you cannot just give money to every bank and financial institution. Some of them are really insolvent. It is better to close them down, restructure them and whatever. Other ones have financial problems, they need capital and liquidity, the Government should give them, clean it up, and you should not shut them down. So it is important not just to give money to everybody, but to make a distinction between those that are bankrupt, and those that have to be rescued. Not a lot of that has been done. Two, you know since it is a very large fiscal cost, and the taxpayer is paying, you have to make sure it is fair. You might control the compensation of bankers and managers. You make sure they don't do risky things, and so on. And so all this public money is necessary because if you don't fix the banks then the damage to the real economy is going to be more severe, but we have to impose conditions so that it is fair, and it's efficient.


Ipek Cem: What about the cost to the social fabric of the society in terms of unemployment and other issues?


Nouriel Roubini: That's a huge cost, unfortunately this financial crisis now in the U.S. and in advanced economies, and also in emerging market, is becoming an economic crisis. There is going to be outright recession in most of the advanced economies, and even in emerging markets there is going to be a very sharp slow-down of growth from potential. And for countries that used to grow six, seven percent, a growth rate of one or two percent, is effectively like a hard landing. It's very painful and that's why, you know the economic cost of millions of people losing jobs, and losing income, their financial wealth, their retirement wealth, the value of their homes falling, is a huge cost. That's why we have to fix the financial system so that these excesses don't occur, because the financial cost, the job losses, the income, the wealth, the fiscal costs of cleaning up are so huge that this is a financial crisis that should be avoided in the future.


Ipek Cem: You just mentioned emerging markets, and clearly it is a big component of the global economy, especially economies like China, India, Brazil, and I know that you did a lot of work observing the crisis in emerging markets in the 90s which gave you alarm about a possible collapse in the US. Every economy is different, so you could go country by country... What are your views on some of the major emerging markets and how they are handling their crises?


Nouriel Roubini: Well, the first observation is that of course emerging markets have been affected by this U.S. and European economic and financial crisis because, you know, when the U.S. sneezes the rest of the world catches a cold, and in this case it is not just sneezing, it has a severe case of pneumonia, so the financial contagion unfortunately has been large, and the trade channels, the financial channels and others imply negative effects on growth of emerging markets. Of course some emerging markets have better policies, better institutions, better fundamentals. They'll have a bad year, and they're going to then recover, and I would put Turkey among the countries that is in a stronger shape, compared to other ones, but the are other ones that have made major policy mistakes, are much weaker, and some other countries could have outright, severe financial crisis. Some among the major emerging markets, I would say, Russia will have a very large recession this year because with all energy prices so low will be a recession. A country like Brazil, also, going to have very weak economic growth, because they depend on commodities. So the commodity exporters are going to be hurting because of the fall of commodity prices. Some emerging markets, like Turkey, are commodity importers, but some of these countries have large current account deficits, they need their capital and borrowing from the rest of the world to finance their government and their external debt, so... and then they are also linked to trade links to Europe and other countries, so for some of the commodity importers lower commodity prices is good news, but then less exports to Europe, U.S., and tighter financial conditions is bad news. So emerging markets different depending on what are the conditions.


Ipek Cem: What about China, India... these countries?


Nouriel Roubini: I worry about a hard-landing in China. For China is used to grow 10% per year. I predict growth of 5%. I mean other countries 5% looks good, but for China it's a hard-landing, because China needs a growth rate close to 10%, to move every year about ten million poorer rural farmers to the modern, urban, industrial sector. So China's growth of 5% or below is effectively like a mini recession. So that's going to be a very painful thing for China, and I expect that actually China is so dependant on exports to the U.S. and other countries that this fall in demand for their goods is going to have a very negative effect on its economy, and already the latest data suggests that, you know, India is less dependant on trade, but there is fiscal problems. The Government is too large, structural rigidity, current account deficit, needs to borrow from abroad and therefore the shock is going to be transmitted through the credit crunch.


Ipek Cem: You just mentioned Turkey as one of the emerging market actors which could have a softer landing, let's say, or a better recovery than some of the severe cases. I know you have been following Turkey even in your blog in the RGE Monitor. What is your view on Turkey?


Nouriel Roubini: Well, my view on Turkey is that certainly compared to 2001 when you had a very severe economic financial banking crisis, the overall market and financial outlook is much stronger. You have had the primary surpluses and the fiscal condition of the Government is much better. Independent central bank with trying to achieve inflation stability. You have cleaned up your financial system. The banks have much more capital and liquidity. They have less of those mismatches that caused trouble. The supervision and regulation has become much stronger. So the overall framework is there and all these reforms has led to growth, and growth of exports and competitiveness and so on. So the framework from which you started is stronger one. Of course through trade and financial links Turkey is related to global economy when the demand for Turkish exports falls sharply from Europe and other parts of the world, then that's a negative for Turkey when there is that amount of capital available, and cost a bit higher then Turkey has to finance its external debt. It has to roll over the debt of the Government, the debt of corporates. That becomes more difficult. So this current account deficit, and the debts of the private sector, corporate or the Government is always an issue that you have to address. The currency had become, in the past, too strong, is now starting to weaken. That's good news for exports, but in a global economy that is weak then export growth is going to be weak. The value in local currency of foreign debts in foreign currency of the corporates is going to rise. That's a negative. So it's a difficult time for Turkey, I can say.


Ipek Cem: Like every Government, our Government is also facing some pleas for bailing out some segments in the economy, but of course our resources, the resources of the Government are much more limited. We don't have the same kind of reserves as some of the big, developed economies. And then, on the other hand, the IMF is stressing fiscal discipline. How to operate in such a pressure cooker situation?


Nouriel Roubini: Yes, there are definitely constraint policy. In my view, an IMF programme will be actually good for two reasons. One, you may have a liquid in foreign currency twenty, twenty-five billion dollars that given the need to finance fiscal deficit and current account deficit, and roll over some of the debt that comes to maturity of corporates, financial institutions, private sector, public, then that gives you more confidence to be able to do it if market conditions remain tight. And also, you know, Turkey is one of the countries that had a successful experience with IMF after its crisis those IMF programmes led to economic reform, that then led to recovery. So... so on fiscal policy of course there is a trade off between the fact that you want to maintain fiscal discipline for the medium term. That's necessary. And on the other side, in the short run, some degree of fiscal easing appropriate, and you know has to be in the right places, and so on, is needed as well to try to stimulate the economy. Monetary policy is going to become easier as inflation falls and the Central Bank cut rates. So there are many parameters on which the country can work, there are constraints, of course to what it can do, but there is room for kind of having the policies that are going to go in the right direction, restore growth and deal with this financial pressure that we see this year.


Ipek Cem: It seems to me that regardless, we still have this boom and bust cycle in Turkey. You feel that we can go on a more even course, perhaps? ‘Even' is the right word?


Nouriel Roubini: Yes. I do believe, because many of the booms and bust in Turkey in the past were due to, you know, the policy cycles of, you know, periods of high inflation, and then you have to tighten, and then you have a recession, or you have excesses, and then you have crisis. So I think those things happen. I think that the 2001 crisis was a moment of really improving many things for the better. This time around you have difficulties, but most of them are not of your making. You know. You are also the accidental kind of victim of the fact that you have this financial tsunami that's hit from the U.S. the rest of the global economy, and you had done many of the right policies. Of course every country has some vulnerability. In the case of Turkey, still currently on deficits and other imbalances. So, you know, I think this year is going to be difficult year for everybody including Turkey, but I think the lesson is to continue to maintain sound macro, financial and structural reforms because, you know, it will be a difficult year, but then there will be a return to growth. So continuing their path of doing market oriented reforms is necessary, and is going to be the way of recovering and avoiding a more severe downturn.


Ipek Cem: When we talk about Turkey, and even the world, European economies are also quite important, and Europe has had its own bail-outs and Government policies to address the global economic crisis. In particular Britain, Germany, and France are of particular interest. When you look at how these Governments handled the global economic crisis, some people say they are too slow, others say they have better policies than the U.S. What are your views?


Nouriel Roubini: Well, for what concerns the Euro-zone, my view of it is that the European Central Bank has been a bit behind the curve. Has cut interest rates, but too little too late, you know, only recently they cut interest rate to 2%, from 2 and a half, and the US is already down to zero, and there is much more easing of money and creating new facilities. So I think monetary policy has been too slow in the Euro-zone, even fiscal policy has been too slow in terms of stimulus because the country who can afford doing it, like Germany, don't want to do it, and the country that need it the most, like Greece, Italy, Portugal, Spain cannot afford it because they start with large deficits and that. So the policy response in Europe has been too weak and too slow. In part you have to have an agreement within the European Central Bank between sixteen countries – within the European Union between 25, 26 countries – so that reaction has become slower than necessary, and that may imply that this economic contraction in Europe could be longer than otherwise.


Ipek Cem: In the recent years, we've always talked about correlation between global economies, emerging market economies, and within emerging market economies themselves meaning you sell them together, you buy them together in general. Do you see that people will become more cautious, and will try to look at asset categories in more detail when they are making investment choices in the future?


Nouriel Roubini: Yes. I mean what has happened within this crisis is that, you know, we all believe in the benefits of diversification across different assets and regions and countries, because you know sometimes when things go well in the West, they might not go well in Europe or Japan, or vice versa. But one of the things that has happened in this crisis has been that there has been this instead of decoupling, there has been a recoupling of all the economies. Now there is a contraction in U.S., in Europe, in Japan, in advanced economies. Australia, New Zealand, Canada, and there is a very severe slow-down of growth in all emerging markets. There has been a high correlation between economies, and now also high correlation between markets. Stock markets, last year, fell by an average of 50% almost all over the world. There was nowhere to hide. So the benefits of unquoted diversifying your portfolio across different countries, or different types of assets leaving aside just safe cash and safe bonds has been limited, and there has been high correlation because the shock became global. So it doesn't mean that there is no benefit from diversification, but once there is a common shock, a synchronised global recession, there is nowhere to hide.


Ipek Cem: Nouriel, when I read your work I see that you are worried about also other risky asset categories. More falling down of insurance companies, hedge funds, corporate bonds, risky securitisations, swaps for that... What else are we expecting in the U.S. that is hiding under the iceberg?


Nouriel Roubini: Yes. This crisis was not just a crisis of subprime mortgages, or subprime and other mortgages, was commercial real estate loans, credit cards, auto loans, student loans, loans that financed leveraged buy-outs, corporate bonds, and a variety of other assets that securitised the underlying claims – all this different alphabet soup of derivatives, you know, you can understand their names MBS, CDOs, CPDOs, CMOs, CLOs, you know, you have almost every combination of these three word letters, and therefore was much bigger asset and credit bubble that went bust, and also the institution have been affected, has not been just traditional banks, not just investment banks, broker dealers, not just the hedge funds, but now also private equity is in trouble. This morning market funds are in trouble, and a variety of other financial institutions because many of them were doing similar things. Many of them were borrowing short, borrowing a lot, leveraging a lot, and then investing and lending in things that were illiquid or more risky, and therefore the shock has hit a wide spectrum of financial institutions.


Ipek Cem: I know you are not investing in stocks, but how would you allocate a portfolio at this point in time?


Nouriel Roubini: For the next six months I would be just cautious, you know, I think that people for recently they thought that the worst is over, that maybe people can go back into equities. There was a bit of a rally in November, December, but the last couple of weeks, in January, things in the economic news have come out much worse than expected. We have realised many even of the biggest banks in US, they need even more capital of the Government. So I think that overall the flows of news about the economy, about profits, about financial systems, are going to be worse than expected, and that's going to be negative for equities and for other risky assets. So for the time being I will be cautious and stay in the safety of cash, cash-like instruments, safe Government bonds, and only when we see more clearly that there is a light at the end of the tunnel, we are getting out of this tunnel of economic and financial crisis, then of course there will be a more sustained recovery of equities, and of other types of assets, but you know, for the time being, I will be more on the cautious side.


Ipek Cem: When we talk about bail-out packages, and stimulus packages, we are in effect talking about re-orientation of Government resources: money. And we know, for example, the toll of the Iraqi war in terms of weapons and other costs, and other initiatives of the U.S. around the world. Does this mean that the economic crisis can impact U.S. foreign policy?


Nouriel Roubini: In my view, the U.S. foreign policy will certainly change because also there is a change of administration, and the new administration will be more multilateralist, rather than unilateral, more internationalist rather than concentrate only on its own domestic interest, you know, more using also the soft power of the U.S. that is the diplomatic power, not just the hard power of the military, and I would also say that, you know, because of this financial crisis, and because also of policy mistakes in foreign policy, some of the reputation of the United States, and even the good-will towards the U.S. has been reduced, and even some of the friends and allies of the U.S. have been rightly critical of the mistakes the U.S. has made – economic financial policy, foreign policy. So, hopefully, the new administration will have a more constructive attitude, is going to realise that to resolve the global economic financial problems you cannot do it alone, not even the G7 club of advanced economies is enough, is obsolete amid something like the G20 where all the most important emerging market economies are represented to sit down to deal with energy security, energy, global imbalances, global climate change, fixing the financial system. And also on the major geo-political issues of our time, you know, not just the friends and allies of the U.S., but you have to engage also those who are potentially your rival. You have to sit down and talk to Russia, to China, and you have to have the help of countries like Turkey and other ones to resolve the Middle Eastern problems, and the Iraq problem, and so on and so you need kind of balance of power and all the relevant actors regionally and multilaterally to work together to resolve these things.


Ipek Cem: Do you feel that with the global economic crisis there will be a paradigm shift, almost, in the financial services sector? In the 90s I was also working on Wall Street, and working on Wall Street felt like you were on the top of the world. Do you feel there will be a restructuring of financial institutions in terms of also culture?


Nouriel Roubini: There has to be, because you know, there was excessive risk-taking, and there was not appropriate prudential regulations, supervisions of financial institutions, and the way the bankers were compensated led them to the system of bonuses taking too many risk in good times, but then disaster occurs in bad times. Probably there was also even too many  resources going, at least in the U.S., in the financial sector, you know, when 25% of the value of the stock market is financial firms, it used to be 12%. When one third of all profits coming form financial firms means too much money , and too much resources are going  there. Too many of the best minds of the U.S. were going into finance, you know. When you have a country with more financial engineers than computer engineers, or mechanical engineers, you have a problem. So I think you need a reallocation of both human capital, people, and also capital away from finance and into the things more entrepreneurial and lead to longer economic growth, so maybe there was excessive growth of the financial system, at least in the U.S., and the UK – not in other countries. In emerging markets the financial system has to develop and contribute to growth even more than in the past, but in the U.S. it became excessive, maybe people finishing their MBAs, you know, my students are worried about jobs because they all want to go on Wall Street. Maybe they should become entrepreneurs, or do other things. There is more to life than just Wall Street.


Ipek Cem: You sometimes have been criticised for being too pessimistic, for too long. I'd like to find out what is your most optimistic scenario, at this point?


Nouriel Roubini: Well, you know, first of all I think I was more realist rather than pessimist, and on some things, actually, things have even turned out to be even worse faster than I expected. You know, my positive outlook is that you know I am not a permanent bear, I do believe that this process of global economic and financial integration is actually very positive. I think the integration of China, of India, of other emerging markets, these market reforms in countries like yours and others are beneficial for the countries and for the global economy. I believe in, too, free trade being positive, of country being able to pursue export-led growth, openness, and capital flows, you know, foreign direct investment, all these things being good. And I do believe that actually this occasion of this crisis, sometimes a crisis is an occasion to clean up their wrong things, go to better policy and have a stronger foundation for growth, and I am optimistic about the medium term of the global economy. Of course there are challenges... global climate change, resource constraints, all this financial interconnectedness, but I think we are in a world in which we all kind of live together, work and trade together. There is no more an option to reverse openness, and you have to work together. If you work together the opportunity for having longer and sustained economic growth, especially in emerging markets and also in advanced economies is there, so we need to fix the problems to go back to sustained growth. That can be done and therefore the scenario for the global economy for the medium term is a positive one as long as we fix the problems.


Ipek Cem: On this note, I'd like to thank you very much for this interview.


Nouriel Roubini: Pleasure being with you, today.


This transcript was typed from a transcription unit recording and not copied from an original script. Because of the possibility of mis-hearing and the difficulty, in some cases, of identifying individual speakers, NTV networks and Ipek Cem cannot vouch for its accuracy.