Nouriel Roubini on the Global Economy

​Nouriel Roubini is the co-founder and chairman of Roubini Global Economics, an independent, global macroeconomic and market strategy research firm, has extensive policy experience as well as broad academic credentials. He is a professor of economics at New York University's Stern School of Business. Roubini.com, has been named one of the best economics web resources by BusinessWeek,Forbes, The Wall Street Journal and The Economist.

Following is a conversation he had recently with Richard Torrenzano:

Richard Torrenzano: Does being named one of the 100 Top Global Thinkers by Foreign Policy magazine put added pressure on you to consistently provide accurate, "prophetic" analyses?

Nouriel Roubini: My role is not one of a traditional forecaster, as I see myself as someone who can thoughtfully analyze the global economy and markets and make assessments about the direction of the global economy over the medium to long term. I'm not in the business of day to day forecasting. I enjoy what I do. Therefore, I feel comfortable with having had many honors and discussing the big policy issues of the time.

RT: You were dubbed "Dr. Doom," when you predicted the housing bubble and the recession. When you made that prediction, did you think it would create such uproar?

NR: No. At that time I was starting to analyze the global economy. I talked about emerging markets, the financial crisis in the U.S. I made mention of many vulnerable policies, macro-financial and otherwise. Therefore, I was not fully aware of the consequences of making that particular call. In this line of business you're as good as your last prediction. It's not just me. I have a team of almost 100 people working with me all over the world. We analyze what's going on in the global economy, financial markets and link it to our assessment of geo-political risk as well. This is teamwork and something we do all the time.

RT: In a Financial Times article you wrote, "The U.S. economy is a fiscal train wreck waiting to happen that risks ushering in period of minimal growth, high unemployment and deflationary pressure." To jump start the current economic recovery, if you were to advise the President, what would you say?


NR: There are many things we need to do. On one side we need fiscal discipline over time because these budget deficits are unsustainable. 

Paradoxically, in the short term the economic recovery is weak and anemic we need to shorten stimulus somehow to spread the need for a shortened stimulus within the purpose of consolidation. If you can commit to that fiscal consolidation over the medium term, then if you need to borrow stimulus in the short term, no one's going to punish you. Second, I would say that the conditions of the labor markets are still very weak with the unemployment rate almost close to 9%. Anything we can do to jump start hiring by firms is going to be useful.

RT: In a recent interview with CNBC-TV you said, "It's pretty clear the housing market has already double dipped." How can the housing market recover? What needs to be accomplished there before we see a full recovery in that marketplace in the U.S.?

NR: The biggest and most critical thing in the housing market is that there are still millions of households who cannot pay their mortgages. The more homes that go into foreclosure the more the supply, the more prices go down, and the more people are in negative equity. There will be more people walking away from their homes and losing them. One way to deal with the housing problem is to reduce the face value of the mortgages as a way of maintaining people in their homes. Of course, that would imply losses for the banks who made the loans and for the investor who bought the debt. The alternative will be one of further defaults in the millions of foreclosures and ongoing housing and real estate recession.

RT: If we look to another part of the world, particularly China, India and Brazil, you predicted they will collectively grow at 6% this year. That is more than triple the 21/2 plus % for developing economies. What are the emerging economies doing that the U.S. can learn from?

NR: First of all their potential growth is much higher than advanced economies because they're starting with a lower level of per capita income so traditionally emerging markets grow faster. However, I think these emerging markets learn from their own crises as well as crises in Asia and Latin America by fixing their financial system, cleaning up their banks and better supervision and regulations of the financial system.

RT: Let's stay with China and India for a second. In a recent Bloomberg interview you stated India's economy may expand more than China's in the next decade. Why are you so bullish on India versus China?

NR: For a number of reasons. First, while I did say India may grow faster than China, but that's conditional on accelerating a wide range of structural reforms India has to do. The one important difference between China and India is the Chinese model has been one of exponential growth and industrialization, where consumption is only one third of demand. In India domestic consumption is about two thirds of demand. 

China depends very much on the U.S. being able and willing to be the consumer of personal assets or expending more of its income running ever larger surplus deficits so that China could be the producer of first and last resort surplus options.

Now this model of growth of China is broken. Because of the excess debt of the U.S. we need to spend less, consume less, import less to deleverage. China depends on the growth of the U.S. and exports. While in India you have more domestic demand that is dynamic and growing very fast. Over the next decade actually the big challenge that China is going to face is to switch demand from export towards domestic consumption.

RT: In terms of economic crisis you wrote, "Traders and bankers must be compensated in a way that aligns their interests with those of shareholders." How would you accomplish that?

NR: I think about the system where your bonus is not given to you right away, but it's accrued to you. Then two or three years down the line we'll see whether under this adjustment basis whether the investments you made were profitable, in which case you get your bonus. If you don't because you took much risk, then your bonus doesn't come.

RT: Talk to me a little bit about the American economy and how you see things unfolding over next two to five years.

NR: I see them unfolding potentially in the right direction; if, and that is a big if, we follow the right policies. If we don't have the right policies, they could actually be worse.
 
The ideal scenario is one in which we deal with our fiscal problems; we deal with cleaning up the financial system. We invest in our people, education and skills. We invest in the infrastructure. We become more productive; we become more efficient. We become more competitive. The dollar probably has to weaken. 

With historic economic growth after we have cleaned up our balance sheet in the private and public sector, there are a lot of opportunities: entrepreneurship, private development, venture capital and start-ups. The leadership in the U.S. has many factors that can lead to robust economic growth potentially in a few years. Also our political system is blocked – the gridlock in Congress. There is division and lack of bi-partisanship which may lead to another outcome, where we don't have the right policies where we may have a decade of mediocre economic growth.

RT: If we were to do the right policies, do you think we're going to revert back at least economically to where we were? Or do you think the new level of the economy with a higher level of unemployment, people saving more, people not spending as much where we're going to be for the next two to five years?


NR: For the next two to five years probably economic growth is going to remain anemic because we did all this balance sheet repair; spend less, consume less in the private and public sector to save more and to reduce our debt ratio. Without the balance sheet repair, then the basis for strong economic growth down the line is there. But I'll say that, yes, we're in the new normal which at best is going to be for economic recovery. 

Whenever you have a crisis driven by finance, too much debt and leverage, the recovery tends to be for a number of years relatively below trend, subpar, anemic because you have this painful process of a balance sheet repair and leveraging. Probably, that's unavoidable, but it puts the basis for a strong and resilient recovery further down the line if the right policies are implemented.