Wall Street's Fortune Teller
No one on Wall Street has been as prescient about the economic crisis as Nouriel Roubini. He talks with Tunku Varadarajan about his new book, Crisis Economics, why Goldman Sachs is wrong, and the future of England.
Getting time with Nouriel Roubini this week is like scoring an audience with the pope. Even his friends—and I am one—have to jump through hoops set up by zealous publicists at Penguin, which has just published his new book, Crisis Economics. “Meet me at the bar at Jean Georges at 2, so we can talk after lunch,” Roubini tells me by email Wednesday. So I show up at the bar of this deeply swank Manhattan restaurant a half-hour early, his book in hand, to immerse myself (as I wait) in a bracing combination of economics and caffeine. I should have known better. No sooner do I place the book on the counter than the elegant dowager to my left gushes, “I saw him on TV! Roubini, I love him.” The man to my right, giving off a strong whiff of banker, asks me whether I believe everything Roubini says. And so conversations ensue. (Can I dip into the book in peace? No chance.)
“Goldman Sachs is a hedge fund. It’s bigger than any hedge fund. It’s more leveraged, to the power of three or five, than any hedge fund.”
Roubini, a professor at the Stern Business School at NYU, has earned fierce renown for making—as his own book puts it—“the most famous prediction in advance of the [economic] crisis.” In the fall of 2006, he told a skeptical audience at the IMF that the American economy—then thought to be in heavenly condition—was hurtling toward a hellish housing bust, a shuddering oil shock, and the deepest recession since the Great Depression. He was bull’s-eye right, earning him the name of “Dr. Doom,” and he swiftly became, without exaggeration, the best-known economist in a world terrified of the economy.
Do the American people still have faith in capitalism? I ask Roubini, as we exit the restaurant into a limo that will take us to his next meeting, near Wall Street. “I think so,” he says. “They do. But I think that one of the lessons of the financial crisis is that the public also grudgingly realizes that prudential government intervention, at least in the regulation and supervision of the financial system, might be necessary. There isn’t a wholesale rejection of capitalism, but I think there was a greater faith 10 years ago in an unfettered, laissez-faire market economy.”
Roubini’s speech is rapid and oracular, and I notice that the limo driver—a burly Dominican—is cocking his ear in our direction. “What we need to understand is, one, that there are market failures; and two, that there are things like asset bubbles and irrational exuberance. There are periods of booms, bubbles, and manias. These things, if left to themselves, can lead to crashes, to busts, to panics. People say it’s all because of government intervention, but look at what happened in previous centuries, well before we had central banks, and before we had government fiscal policy.”
Is ours a greedier age than any before us? I enquire. “I wouldn’t say that,” Roubini says, and I detect, in the rear-view mirror, a crinkle in the limo-driver’s eye. “Look, in some sense, there’s nothing wrong with greed. If we didn’t have greed, market economies wouldn’t be as innovative as they are. But in my view, greed has to be contained by the fear of losses, so there has to be a system where, if you take too much risk, you go into bankruptcy. You don’t systematically bail out people who take excessive risks.”
Here, our conversation turns to Goldman Sachs, currently the focus of an SEC complaint and criminal investigations. “I think the substantial issue with Goldman,” Roubini observes, “is one of perception—not necessarily of illegality, but of conflicts. In any one of these large financial conglomerates where you have commercial banking, investment banking, ‘prop’ trading, private equity, hedge funds, insurance, underwriting of securities, and asset management, you have massive conflicts of interest. And these conflicts imply that you are on all sides of every trade. You have the incentive to ‘front-run’ your clients. Chinese Walls don’t mean anything… those Chinese Walls at financial institutions are just a joke!”
So how would reform, or regulation, deal with these conflicts? I ask. “I’m a radical on that,” Roubini says, pausing for effect. “There are no real economies of scale and scope from having, within the same firm, all these different activities. These institutions become large—not too big to fail, but just too complex to manage. There’s no way in which even the most brilliant CEO or board of directors can monitor thousands of ‘P&Ls’ [profit-and-loss centers], and every single trader and banker within a financial institution is a separate ‘P&L.’ Therefore, I’m of the view that those financial services should be done by separate types of institutions.”
Roubini, here, picks up a head of steam: “Look, I’ve nothing against Goldman Sachs. But Goldman Sachs isn’t an investment bank. Goldman Sachs is a hedge fund. It’s bigger than any hedge fund. It’s more leveraged, to the power of three or five, than any hedge fund. And unlike other hedge funds, it has access to zero-interest loans from the Fed, and to implicit and explicit guarantees of the government. So if Goldman thinks they are so good at ‘prop’ trading that they can make a profit every day—as they did in the last quarter… there was not a single day on which they lost money—fine, let them be a ‘prop’ trading firm, be a hedge fund. But don’t use the taxpayers’ money to do stuff that’s very risky and highly leveraged. But not only do they do that, but they ‘front-run,’ in 10 different ways, their own clients.”
I ask Roubini, next, how he thinks President Obama is handling the economy. “I think the glass is, I would say, half-full,” he replies. “To those who are very critical, I say this: The guy inherited the worst economic and financial crisis since the Great Depression. It was not of his making. The budget deficit, people forget, was already $1 trillion when he took office. The bailout started under Bush, with Bear Stearns, Fannie and Freddie, AIG, then the TARP. So he inherited a mess, and the worry, a year ago, of the risk of a new depression. And through a combination of good policy and some luck—easy money by the Fed, fiscal stimulus, and backstopping the financial system—we are out of this recession. There is a recovery. Maybe the recovery is going to be only tentative, anemic, subpar, but—hey!—we’ve avoided the worst. So I’d give Obama an A-minus.”
But Roubini is alert to Obama’s policy mistakes, too: “We have the burden, now, of large fiscal deficits that we have to deal with, otherwise we’re going to have trouble down the line. Obama should start to worry about reducing the fiscal deficit sooner rather than later, and he’s not doing it. There’s a risk of a fiscal crisis—the next stage of the financial crisis. And I’m concerned about adding something like a health-care plan on to the existing unfunded liabilities of the government. To me, it’s important that we fund it properly, rather than have another open, unfunded liability.”
As we approach our destination, I ask Roubini about Britain, which has just got a new coalition government. “I think the biggest challenge the U.K. faces—which is the same challenge as the Euro-zone, Japan, and the U.S.—is one of fiscal consolidation. The political system there will have to decide how much adjustment will occur by cutting spending, and how much by raising revenues. If I were [David] Cameron, I would note that the share of employment that’s gone into the public sector has increased from 25 percent to 35 percent—a significant increase. Some of it is inefficient and bloated, and there are a number of ways of cutting the spending and salaries of public employees. There is plenty of fat that can be cut.
“But I think that, at some point, Cameron will have to raise some revenues. And what Cameron might be doing is to introduce a tax and call it a ‘Brown tax,' and blame it on Labour, saying, this is a tax we have to raise to clean up the mess made under Labour.”
Will Cameron pay a political price for this? “If all this fiscal austerity is done early in his term, there will be some pain, but by the time the country recovers and the next election occurs, he will probably be rewarded for having done the right thing.”
And with this, we pull up near Wall Street. There are crowds of tourists milling around, pointing at buildings and banks. But mercifully, no one recognizes him as he melts into their midst. If only they knew who he was, they’d point at him, too.
Tunku Varadarajan is a national affairs correspondent and writer at large for The Daily Beast. He is also a research fellow at Stanford’s Hoover Institution and a professor at NYU’s Stern Business School. He is a former assistant managing editor at The Wall Street Journal. (Follow him on Twitter here.)