Serious People
by digby
We all know the Village loves to continuously reward those who have been wrong by turning to them for solutions to problems they had a hand in creating, but we can’t forget that they also ignore those who were right.
In the case of the financial crisis, nobody was more right that Nouriel Roubini, who was recently featured in this profile in the New York Times:
Dr. Doom
On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac. The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer. But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities. When Roubini returned to the I.M.F. last September, he delivered a second talk, predicting a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. “He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.” Over the past year, whenever optimists have declared the worst of the economic crisis behind us, Roubini has countered with steadfast pessimism. In February, when the conventional wisdom held that the venerable investment firms of Wall Street would weather the crisis, Roubini warned that one or more of them would go “belly up” — and six weeks later, Bear Stearns collapsed. Following the Fed’s further extraordinary actions in the spring — including making lines of credit available to selected investment banks and brokerage houses — many economists made note of the ensuing economic rally and proclaimed the credit crisis over and a recession averted. Roubini, who dismissed the rally as nothing more than a “delusional complacency” encouraged by a “bunch of self-serving spinmasters,” stuck to his script of “nightmare” events: waves of corporate bankrupticies, collapses in markets like commercial real estate and municipal bonds and, most alarming, the possible bankruptcy of a large regional or national bank that would trigger a panic by depositors. Not all of these developments have come to pass (and perhaps never will), but the demise last month of the California bank IndyMac — one of the largest such failures in U.S. history — drew only more attention to Roubini’s seeming prescience.
He claims that he hasn’t been consulted by congress or the treasury and I believe him. Doing so would mean that all the serious people who have been saying that we had averted a crisis were wrong — and also saying that the plan as currently conceived by those people was also wrong.
I don’t know what the plan is going to finally look like, obviously. But as of Friday, Roubini wasn’t sanguine about what he was seeing. He certainly backs intervention, as do nearly all economists, but he characterizes this bailout in terms that are quite startling:
The Treasury plan (even in its current version agreed with Congress) is very poorly conceived and does not contain many of the key elements of a sound and efficient and fair rescue plan. Like in my 10 step HOME plan many other economists and commentators (Charles Calomiris, Raghu Rajan, Kotlikoff and Mehrling, Luigi Zingales, Martin Wolf, Barry Ritholtz, Chris Whalen and twenty others whose views have been featured this week in the RGE Monitor group blogs) have presented ideas that would have minimized the cost to the US taxpayer of a resolution of this financial crisis. It is a disgrace that no professional economist was consulted by Congress or invited to present his/her views at the Congressional hearings on the Treasury rescue plan.
Specifically, the Treasury plan does not formally provide senior preferred shares for the government in exchange for the government purchase of the toxic/illiquid assets of the financial institutions; so this rescue plan is a huge and massive bailout of the shareholders and the unsecured creditors of the firms; with $700 billion of taxpayer money the pockets of reckless bankers and investors have been made fatter under the fake argument that bailing out Wall Street was necessary to rescue Main Street from a severe recession.
The Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown.
If that’s true, then this plan will end up being an economic Iraq. And just as people who said “No Blood For Oil” were told to sit down and shut up or risk having the boogeyman use drone planes to create mushroom clouds in shopping malls, those who are saying today, “no bail out for the rich” are similarly being told that the global economy will suffer a nuclear meltdown if the government doesn’t spend this enormous amount of money. And just like then, this all happened in the few short weeks between September and November in a major election year.
We don’t know if there are financial WMDs out there. Certainly, enough people think there are that you can’t dismiss it. But when the experts who have been predicting the WMD say that the plan to rid the world of them is fatally flawed and won’t cure the problem, then they should be listened to. And unfortunately, that won’t happen. We’re listening to the usual suspects who have always been wrong about everything. And the results are likely to as good as they always are.
I’m not expert in these matters, but the more I read, the less I’m sanguine that this huge giveaway is designed to do anything but constrict the next president from being able to successfully intervene in the recession. The money will be gone, the problem will be growing and there will be fewer tools available to adequately stimulate the economy.
I wish that Barack had made the explicit argument in the debate that he would have to spend money on infrastructure and alternative energy to stimulate the economy by creating jobs, while reforming health care to take the cost burden off of businesses and reduce overall expenditures. If there is going to be a severe recession as everyone says, then the argument needs to be made forcefully, right now, that the government will have to spend a lot of money to keep it from spiraling down. If they don’t, then this bailout of Wall Street, which is being mischaracterized as the saving of Main Street as well, is going to be the only shot allowed, because the fiscal scolds are already gathering to hammer home the message that the government is broke and can’t afford to spend the money.
John McCain called for a freeze on government spending in a recession and he’s crazy enough to do it. If he wins it’s a terrible disaster on a number of different levels. But you can bet that even if he loses he will become a leader of the Republican Obstruction caucus and will do everything in his power to prevent the government from doing what it very likely will need to do — spend money.
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