Roubini and Other Doomsayers Will Be Proven Wrong

Roubini has been right in his predictions as of late, but developments from now on will prove that he is off the mark, just as so many forecasters had fared before. The chances are that the stock market has already found a bottom, and a strong stock market will bring back the confidence that is needed to maintain a decent recovery.

The Fed’s aggressive quantitative easing is exactly what is needed for now. Many people worry about run-off inflation, but there will be no noticeable inflation until the economy is well on its way to recovery. When the economy does begin to show signs of healthy growth, the Fed can always at that point mop up any excess liquidity there is through open market operation. As long as the Fed and the government are doing the right things in ensuring accountability, transparency, and no excessive leveraging in the markets, I shall have no worry for a new bubble.

The majority of recessions to date are caused by policies. The previous deep recession in 1981-82 was engineered by Paul Volcker to squeeze inflation out of the system. Even though that was applauded by some I take issue with that because the economic pain engendered had been horrendous. This current deep recession—some call a mini depression, was in the final analysis caused by a lapse of regulation allowing excessive leveraging and extending too many loans to poor risks, though it was triggered by monetary tightening which was turning excessive by mid 2005. I had forewarned of the recession in an op-ed in Hong Kong back in July 2005. The weak dollar helped delay the recession, but the asset price collapse fed by a “fear-fear spiral” eventually brought the economy to its knees. Before the recession finally set in everything still seemed rosy, but the mistaken policy errors were already taking the effect.

Similarly this time around, everything looks terrible, and the doomsayers looking at unemployment figures, factory orders, consumer confidence, the purchasing managers indices, etc., saw nothing to cheer about. But the policy makers are already paving the groundwork for a recovery. In my earlier articles, I wrote positively about the circuit breaker mechanism, and the purchase of toxic assets from troubled banks is an effective circuit breaker that the Obama administration is putting into place. Interest rates have come down a long way. Quantitative easing is putting much needed liquidity into the banking system. An expansionary fiscal policy is taking up the slack opened up by a slowdown in private sector economic activities.

Of course, these policies take time to show their positive effects, just as the terrible lapse of regulation took time to show their terrible effects. Once market psychology changes, the fear-fear spiral will give way to a cheer-cheer spiral. I had been championing a housing buy-back program as a “fail-safe” way to prevent the deterioration of bank balance sheets(see my earlier articles). They certainly would have accelerated the recovery. But I had argued that a successful lifting of toxic assets off the troubled banks’ balance sheets will still be effective.

The current bounce of stocks is far from a dead cat bounce. Roubini and other doomsayers are mistaken this time around.

Comments

[huskerbob:]

Your article reminds me of a quote from F. Scott Fitzgerald: "The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function." Take it as a compliment.
"As long as the Fed and the government are doing the right things in ensuring accountability, transparency, and no excessive leveraging in the markets, I shall have no worry for a new bubble."
Given this caveat, I have trouble understanding your optimism. Did someone add this to your article without your knowledge?
All of the bad actors are being bailed out. Massive malinvestment due to easy credit caused this mess, and now the same actors are being bailed out with the idea that they will extend more cheap credit!
I have not read many articles praising the transparency of the bailout so far. Geithner's new plan is a leveraged fund. Who is being held accountable (besides the taxpayers)?
Accountability? No.
Transparency? No.
No excessive leveraging? No. Especially when you consider that it's taxpayer money being put at risk.
Your "cheer cheer spiral" is a few more years down the road, but thanks for the happy thoughts.

Mar 24 04:34 AM

[Steven Hansen:]

at this point this recession is more about structural organic weakness than financial weakness or bubbles. the financial crisis is more than a banking crisis.

you are assuming there are underlying fundamentals which business can play for recovery. exactly what do you think those are?

Roubini and other economists are not market soothsayers.

Mar 24 04:58 AM

[JudeJin:]

professor, if you truly believe in your world currency unit proposal, you'd probably know we do need one now to replace the dollar before this crisis can pull itself out of the abyss.

Mar 24 06:44 AM

[socrateazz:]

Interesting! Yay Saved by the fast talk of ignorant social science believers acting like economists. Belief will cause action which work! I want my barber to perform surgery on me. It works for the government, surely my barber has more experience cuting things. and he can fast talk anybody! Words matter, Right. I guess I better start living by the word....Hope can cure anything. We will see. The future is the result of decisions made today! I give a 1% chance the bank plan I heard will actually do what the administration expectsand holds up the economy. I expect a string will not hold up tons of stupidity. and when it breaks, it will be because of one of the weights is to blame and not the person building the string. what we all love is alive! Blame, shame, claim, flame and string along! Isn't the US wonderful.

Mar 24 07:06 AM

[donzoab:]

Nice thoughts but just the section on world currency is tough. The chinese manipulate their currency so forcefully that how could you trust the value of one the whole world uses??
Too many conflicting players. Geithner's plan does nothing more then bail out Goldman Saks, JPM and other greedy players sending a bad signal to the worlds investors. (and think about the example it teaches our children). Shame

Mar 24 07:23 AM

[Chezfrederick:]

It's nice to read a positive perspective... But the analysis was light leading me to assess it as wishful thinking. I was dismayed by the Geitner bank plan, as I found it to be too generous in absorbing 100% of the risk for the account of taxpayers, while further encouraging substantial leverage... Could this feed into the next bubble?

I hope I am wrong and you are right.

Mar 24 07:45 AM

[wdhalgren:]

"there will be no noticeable inflation until the economy is well on its way to recovery. When the economy does begin to show signs of healthy growth, the Fed can always at that point mop up any excess liquidity there is through open market operation."

I've seen others make this statement, including fed officials. Does anyone actually believe that? What's the most recent precedent; Paul Volcker? Greenspan and Bernanke haven't mopped up any liquidity in 20 years. Instead they've created serial investment bubbles through prolonged excess liquidity and creation of the next bubble is currently in progress. You can continue to preach "trust in fed" if it pleases you, but the congregation has left the building.

Mar 24 08:56 AM

[Ferdinand E...:]

Professor, I gave some brilliant lectures on electric market restructuring when I was at the Energy Studies Institute in Hong Kong (Baptist University). If you attended them you perhaps remember me saying that the way to get the right answers in economics is to begin at the bottom line, if possible. I won't claim that I am certain, but I think that 'the hand' has the right bottom line here: the problem is probably more structural (if that is the right term) than financial. I haven't tried to sort that problem out - or 'sort it' as the birdbrains in the UK often say - because that is going to be very very difficult. Maybe too difficult for humble me.

Mar 24 09:39 AM

[geewow:]

Professor, I hope you are correct, but my gut says you are not. The Obama administration is using trickle down economics, it seems, to bring about a recovery. It failed before, and therefore, it will fail again. You cannot bring a recovery with monetary policy. Show me a time when it worked?

The only recovery is one from the bottom-up. If the dollars had been spent in rebuilding manufacturing, as the Chinese central bank is doing domestically, then we would have a recovery.

Trickle down does not work.
eye-on-washington.blog...

Mar 24 12:03 PM

[Fred Voetsch:]

"The majority of recessions to date are caused by policies."

And that is where you go wrong.

Most recessions are simply caused by the business cycle and then the big ones are caused by generational patterns in which elders who had learned lessons about what excess leverage can do to an economy pass on and a new generation takes control and makes all the same mistakes all over again.

Some of course are caused or exacerbated by demographics as well and there are other factors but most recessions are not caused by policy.

Mar 24 03:08 PM

[CaptainJJack:]

Let's say that the doomsdayers are right, and there is another $500 billion in losses by the biggest banks. If I understand the math right, the top 4 banks should generate around $250 billion in pretax operating profit in 2009.

So, even if they are right, the banks should be pretty much back by the end of 2010 -- and that is a pretty pessimistic scenario, especially because it is almost guaranteed that Bernanke will be successful in reflating the asset prices.

If printing money did not result in inflation, the Fed could buy up all the GDP by just printing up enough money to equal the GDP.

Mar 24 06:08 PM

[Stockmajor:]

"The current bounce of stocks is far from a dead cat bounce. Roubini and other doomsayers are mistaken this time around."

I agree. And yes, "Hope can cure anything." Thoughts are things. And the collective belief and drive of millions of people working together transcends limitations.

I choose to be on the side of promoting positivity and believing yes, we can.

Mar 24 11:56 PM

[Lok Sang Ho:]

This bubble is not so much caused by excessively low interest rates as it is caused by lapse of common sense regulation. If you encourage or forbear lending to people who cannot afford the loans or who cannot afford the down-payment, and if you let companies insure against events that they are undercapitalized to insure, and if you condone excessive leveraging by financial companies with little accountability, you will have bubbles. The Obama/Bernanke team is seeing to it that this will not happen again.


On Mar 24 08:56 AM wdhalgren wrote:

> "there will be no noticeable inflation until the economy is well
> on its way to recovery. When the economy does begin to show signs
> of healthy growth, the Fed can always at that point mop up any excess
> liquidity there is through open market operation."
>
> I've seen others make this statement, including fed officials. Does
> anyone actually believe that? What's the most recent precedent;
> Paul Volcker? Greenspan and Bernanke haven't mopped up any liquidity
> in 20 years. Instead they've created serial investment bubbles through
> prolonged excess liquidity and creation of the next bubble is currently
> in progress. You can continue to preach "trust in fed" if it pleases
> you, but the congregation has left the building.

Mar 25 09:35 AM