Tuesday, April 2, 2013

Roubini on the Global Economy

My first awareness of Nouriel Roubini was in 2008 as the US and global economies fell into the toilet. His current assessment of the world economy in a moment but first a little history.

Memories fade with time and few people now recall, just five years later, the level of panic that seized the country and leadership of both political parties in 2008-9.  Later came the days of  stimulus packages and Rahm Emmanuel's famous "you never want a serious crisis to go to waste."  But most people have now forgotten that Barack Obama may have been elected in November but he didn't become president until the following January. Meantime a lame duck Congress was gasping for leadership like the rest of the country and the president-elect instantly closed ranks with his electoral adversaries to insure that everybody in the capital was speaking one message: The country is facing an economic crisis and we must move quickly and decisively to avert disaster.  The Troubled Assets Relief Program (TARP) had been pushed through Congress at lightening fast speed in response to the sub-prime lending crisis bubble and signed into law by President Bush in October, even before the election was final.  And Obama was tossed into the boiling mess even before he took the oath of office. The Wikipedia timeline at TARP is instructive.
On October 14, 2008,  [Remember, the election was still in progress...] Secretary of the Treasury Henry Paulson and President Bush separately announced revisions to the TARP program. The Treasury announced their intention to buy senior preferred stock and warrants from the nine largest American banks. The shares would qualify as Tier 1 capital and were non-voting shares. To qualify for this program, the Treasury required participating institutions to meet certain criteria...
The first allocation of the TARP money was primarily used to buy preferred stock, which is similar to debt in that it gets paid before common equity shareholders. This has led some economists to argue that the plan may be ineffective in inducing banks to lend efficiently.
On November 12, 2008, Secretary of the Treasury Henry Paulson indicated that reviving the securitization market for consumer credit would be a new priority in the second allotment.
On December 19, 2008, President Bush used his executive authority to declare that TARP funds may be spent on any program that Secretary of Treasury Henry Paulson, deemed necessary to alleviate the financial crisis.
On December 31, 2008, the Treasury issued a report reviewing Section 102, the Troubled Assets Insurance Financing Fund, also known as the "Asset Guarantee Program." The report indicated that the program would likely not be made "widely available."
On January 15, 2009, the Treasury issued interim final rules for reporting and record keeping requirements under the executive compensation standards of the Capital Purchase Program (CPP).
On January 21, 2009, the Treasury announced new regulations regarding disclosure and mitigation of conflicts of interest in its TARP contracting.
On February 5, 2009, the Senate approved changes to the TARP that prohibited firms receiving TARP funds from paying bonuses to their 25 highest-paid employees. The measure was proposed by Christopher Dodd of Connecticut as an amendment to the $900 billion economic stimulus act then waiting to be passed.
On February 10, 2009, the newly confirmed Secretary of the Treasury Timothy Geithner outlined his plan to use the remaining $300 billion or so in TARP funds. He intended to direct $50 billion towards foreclosure mitigation and use the rest to help fund private investors to buy toxic assets from banks. Nevertheless, this highly anticipated speech coincided with a nearly 5 percent drop in the S&P 500 and was criticized for lacking details.
On March 23, 2009, U.S. Treasury Secretary Timothy Geithner announced a Public-Private Investment Program (P-PIP) to buy toxic assets from banks' balance sheets.
On April 19, 2009, the Obama administration outlined the conversion of Banks Bailouts to Equity Share.
I will never forget that as the global magnitude of this crisis unfolded that Conservative talk radio and the newly-hatched Tea Party anti-tax movement was propagating the idea that the main problem causing all the trouble was government handouts to lazy people in return for votes. The message: government, by encouraging banks to lend poor people at sub-prime rates, caused the housing bubble. The Community Reinvestment Act was cited repeatedly as though it had just come into being, despite the fact that it began in 1977 as an effort to curb red-lining of poor neighborhoods by lending institutions. Even after it became clear that places with the most dramatic run-up in speculation had no poor people, the myth survived that government give-away policies were at the core of the crisis. And to this day -- in the same way that most Americans have no idea that there was no connection between Iraq and the attack on the World Trade Center, or that there was no Al Qaeda in Iraq prior to the US invasion -- many people lay the blame for the crisis of 2008 at the feet of Barack Obama and "government spending."

The longer I live the more I am amazed at the depth of public ignorance about these and many historical realities.

But back to Roubini.

C-SPAN's Washington Journal had Roubini as a guest in 2008 and I recall at least two callers thanking him for advising people to get out of the stock market the previous year, warning that a serious economic problem was coming. His nickname had been (and still is) "Doctor Doom" because he always sees the downside of what might be coming. But after 2008 he became a rock star in the world of economics and has remained there ever since.  Here he is at that time as a guest on C-SPAN with his frumpy-looking necktie and monotone delivery, the image of a NYU academic.
But pay attention to what he is saying.

With that background, here is what Nouriel Roubini says now in his assessment of the world economy.
The Global Economy on the Fly
Author: Nouriel Roubini  April 1st, 2013 
In the last four weeks, I have traveled to Sofia, Kuala Lumpur, Dubai, London, Milan, Frankfurt, Berlin, Paris, Beijing, Tokyo, Istanbul, and throughout the United States. As a result, the myriad challenges facing the global economy were never far away. 
In Europe, the tail risk of a eurozone break-up and a loss of market access by Spain and Italy were reduced by last summer’s decision by the European Central Bank to backstop sovereign debt. But the monetary union’s fundamental problems – low potential growth, ongoing recession, loss of competitiveness, and large stocks of private and public debt – have not been resolved. 
Moreover, the grand bargain between the eurozone core, the ECB, and the periphery – painful austerity and reforms in exchange for large-scale financial support – is now breaking down, as austerity fatigue in the eurozone periphery runs up against bailout fatigue in core countries like Germany and the Netherlands. 
Austerity fatigue in the periphery is clearly evident from the success of anti-establishment forces in Italy’s recent election; large street demonstrations in Spain, Portugal, and elsewhere; and now the botched bailout of Cypriot banks, which has fueled massive public anger. Throughout the periphery, populist parties of the left and right are gaining ground. 
Meanwhile, Germany’s insistence on imposing losses on bank creditors in Cyprus is the latest symptom of bailout fatigue in the core. Other core eurozone members, eager to limit the risks to their taxpayers, have similarly signaled that creditor “bail-ins” are the way of the future.
Outside the eurozone, even the United Kingdom is struggling to restore growth, owing to the damage caused by front-loaded fiscal-consolidation efforts, while anti-austerity sentiment is also mounting in Bulgaria, Romania, and Hungary. 
In China, the leadership transition has occurred smoothly. But the country’s economic model remains, as former Premier Wen Jiabao famously put it, “unstable, unbalanced, uncoordinated, and unsustainable.” 
China’s problems are many: regional imbalances between its coastal regions and the interior, and between urban and rural areas; too much savings and fixed investment, and too little private consumption; growing income and wealth inequality; and massive environmental degradation, with air, water, and soil pollution jeopardizing public health and food safety. 
The country’s new leaders speak earnestly of deepening reforms and rebalancing the economy, but they remain cautious, gradualist, and conservative by inclination. Moreover, the power of vested interests that oppose reform – state-owned enterprises, provincial governments, and the military, for example – has yet to be broken. As a result, the reforms needed to rebalance the economy may not occur fast enough to prevent a hard landing when, by next year, an investment bust materializes. 
In China – and in Russia (and partly in Brazil and India) – state capitalism has become more entrenched, which does not bode well for growth. Overall, these four countries (the BRICs) have been over-hyped, and other emerging economies may do better in the next decade: Malaysia, the Philippines, and Indonesia in Asia; Chile, Colombia, and Peru in Latin America; and Kazakhstan, Azerbaijan, and Poland in Eastern Europe and Central Asia. 
Farther East, Japan is trying a new economic experiment to stop deflation, boost economic growth, and restore business and consumer confidence. “Abenomics” has several components: aggressive monetary stimulus by the Bank of Japan; a fiscal stimulus this year to jump start demand, followed by fiscal austerity in 2014 to rein in deficits and debt; a push to increase nominal wages to boost domestic demand; structural reforms to deregulate the economy; and new free-trade agreements – starting with the Trans-Pacific Partnership – to boost trade and productivity. 
But the challenges are daunting. It is not clear if deflation can be beaten with monetary policy; excessive fiscal stimulus and deferred austerity may make the debt unsustainable; and the structural-reform components of Abenomics are vague. Moreover, tensions with China over territorial claims in the East China Sea may adversely affect trade and foreign direct investment. 
Then there is the Middle East, which remains an arc of instability from the Maghreb to Pakistan. Turkey – with a young population, high potential growth, and a dynamic private sector – seeks to become a major regional power. But Turkey faces many challenges of its own. Its bid to join the European Union is currently stalled, while the eurozone recession dampens its growth. Its current-account deficit remains large, and monetary policy has been confusing, as the objective of boosting competitiveness and growth clashes with the need to control inflation and avoid excessive credit expansion. 
Moreover, while rapprochement with Israel has become more likely, Turkey faces severe tensions with Syria and Iran, and its Islamist ruling party must still prove that it can coexist with the country’s secular political tradition. 
In this fragile global environment, has America become a beacon of hope? The US is experiencing several positive economic trends: housing is recovering; shale gas and oil will reduce energy costs and boost competitiveness; job creation is improving; rising labor costs in Asia and the advent of robotics and automation are underpinning a manufacturing resurgence; and aggressive quantitative easing is helping both the real economy and financial markets 
But risks remain. Unemployment and household debt remain stubbornly high. The fiscal drag from rising taxes and spending cuts will hit growth, and the political system is dysfunctional, with partisan polarization impeding compromise on the fiscal deficit, immigration, energy policy, and other key issues that influence potential growth. 
In sum, among advanced economies, the US is in the best relative shape, followed by Japan, where Abenomics is boosting confidence. The eurozone and the UK remain mired in recessions made worse by tight monetary and fiscal policies. Among emerging economies, China could face a hard landing by late 2014 if critical structural reforms are postponed, and the other BRICs need to turn away from state capitalism. While other emerging markets in Asia and Latin America are showing more dynamism than the BRICs, their strength will not be enough to turn the global tide.
Note he makes a distinction between the real economy and the financial markets.
They are not the same, you know. They are interdependent, of course. But when the financial markets collapse there will always be a real economy.

1 comment:

  1. Interesting that the same day I remembered TARP this news should come across the wires....
    "TARP Is Mostly Dead and Fannie Mae Is Alive"

    "Fannie Mae, the government-funded mortgage lender, had some surprising news earlier today. During 2012, for the first time in four years, it didn't require any funding from the Treasury Department. And, better yet, it contributed $7.6 billion back into the government's pocketbook. Which inspired us to check in on the government's other semi-willing recession-era investments."