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The one dot Roubini can't connect
Saturday, February 21, 2009
There's a very good interview with Nouriel Roubini in today's Wall Street Journal - it's well worth a look and it's free. After talking about his contemporaries and how he was able to "connect the dots", he leaves one dot unconnected.
"People like [Robert] Shiller were very worried about the housing bubble. People like Steve Roach were worried about an economy based on asset bubbles leading to consumption bubbles that were unsustainable. People like Ken Rogoff talked about global imbalances in the current account deficit not being sustainable. Nassim Taleb has been worrying for a while about 'fat tail' events . . . . So lots of people signaled concern about things. I was one of those who put the dots together and thus gave a more fleshed-out picture."Uh... Easy money?
To Mr. Roubini, the most interesting question isn't the one of who got it right. Instead, he asks why we "over and over again, get into these periods of irrational exuberance, when not only is there an asset bubble and a credit bubble, but people believe these are sustainable over a long time -- Wall Street, policy makers, rating agencies, academics, journalists . . . ."
Those aren't hard dots to connect.
There's much more, including a well-deserved dressing down of the former Fed chairman.
11 comments:
More of the absurd "Greenspan = ultra free market" meme...
Yes if we get rid of Greenspan, all our problems are over. Good thing he's gone now. Whew!
"Keynesian" economics? The US hasn't followed Keynesian policy since the inflation of the '70's. What got us into this mess is a conflation of Milton Friedman free-marketism combined with Dick "Deficits don't matter" Cheney style spending sprees. Greenspan would be insulted to be called a Keynesian, he would claim to be a Monetarist, if anything.
Keynes was well aware of the basic bubble/bust tendency of capitalism, and argued the the gov't needed to lean against the bubble (increased taxes and interest rates) and prop up the bust. Blaming him for Bush's profligacy makes about as much sense as reading in a diet book that you can have a teaspoon of ice cream after you eat your vegetables, skipping the veges and eating only ice cream, then blaming the diet book because you weigh 300 pounds.
You want to blame somebody, blame the entire Chicago school's hatred of sensible regulation. Without their theoretical underpinnings of the supposed self-regulating market, you never would have seen the explosion of crazy loans and derivative securities that got us so deep into this mess.
And the free-trade apologists that lead to 7% GDP current account deficits? Don't get me started on them, Keynes was against that too.
My apologies to John Maynard who is often times unfairly blamed for the current mess. The text above has been updated to the more inclusive "contemporary economic theory" which includes Keynes and others.
Economies experienced asset bubbles long before Keynesian economics came along. People have been getting irrationally exuberant about hard-to-value assets ever since the Dutch tulip bulb mania. These episodes have more to do with generational psychology than easy credit.
How about a reference for the "bubbles without easy credit" thesis? I'd be interested in learning how that works.
Asset bubbles are due to easy credit. That is the way the game has always been played.
Don't hold your breath waiting for a jubilee to relieve debt slaves of their burden.
The elite have removed sensibility from the rulebook.
I'd agree with easy credit. Or to take Minsky's view, expansions proceed until everyone gets too optimistic, lending too freely (or selling stock, like the south sea bubble) in all kinds of enterprises that are never going to pay off. Or like the US in the case of the railroads, they were a good investment but got overbuilt and oversubscribed (dot-com, anyone?)
Like some Englishman said, "wealth isn't destroyed in the bust, what is revealed is how much wealth had already been destroyed through malinvestment"
"Keynes was well aware of the basic bubble/bust tendency of capitalism, and argued the the gov't needed to lean against the bubble (increased taxes and interest rates) and prop up the bust."
Well that's the thing even if you argue that Keynes was right economically, you still have to admit he was a complete and utter idiot in his understandings of the workings of government.
What about the tendency of government not to raise taxes or interest rates in good times? It's as much of a law as anything.
These bubbles have been driven by "Management Capitalism". Where Managers run their business for the Massive Short Term Bonus, and nothing else.
You've OVER-PAID these guys So Much that the Only thing they cared about was their BONUS.
I think that is the essential of greed. The leadership is leading the others in behaving the average individual is behaving. The CEOs, and board of directors are hand in glove for their own profits, and bonuses, and short term gains did this. Think about it - if you can make millions of dollars that your generations may not have to work, won't you do it? This is the same behavior that drives zillions of small time guys in startups. The slog in the hope of making a cool million or two and retire.
Of course, some people will say that there is power, and something bigger than money. But, for most of us money drives us.
And, you would think where are the controls. The controls by Board of directors and others are sham. The board is mostly golfing with the CEO, and Chairman of the board, and is not really managing anything.
There was an excellent article in NYT 3-4 years back regarding how people who make $250-450K are mad with the excess at the top. But, reality is no one objects when things are good due to these easy money policies because everyone is benefitting in the short term (which could be relly long like 25 years if you start it with 1982)> of course, the euphoria really builds up in only 3-4 years. This time it may have happened in 2 stages- one with internet before 2000, and now with real estate.
And, most of the time people who lose are the ones that are not rich or ultra rich. But, of course, the mosy affected ones are the bottom 20-25%. That is why even though I do not like the solutions like mortgage relief, I think it is kind of way of redistributing wealth which got skewed in the first place during bubble years. But, in reality redistribution of wealth does not happen - unless there is war. because whatever US has lost because of globalization. that wealth is lost to China, India, Middle east, Russia, Japan, etc. That does not come back unless ther is forced redistribution through wars.
I think our standard of living is impacted no matter what. at least we come up with some great innovations, and start selling it, and the rest of the world "wants" it.
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