Wednesday, October 29, 2008

Economy's 'Dr. Doom' Makes Heroic Call

He's been called Dr. Doom.
No, I'm not referring to the comic book super-villain and longtime nemesis of the Fantastic Four. For the last few years that nickname has been hung on Nouriel Roubini, professor of economics at the Stern School of Business, New York University, who in 2006 rightly predicted the economic malady now infecting the entire globe.
At the time, Roubini was written off by peers and Wall Street elite as an overly pessimistic crank.
Cranky he may have seemed, but overly pessimistic? Nope.
Buttressed by an uncanny ability to peer beyond the smoke,mirrors and spin of high finance, Roubini determined that an economic catastrophe was coming. The calamity would not be caused only by sub prime mortgages, which are still viewed as the ultimate culprit of the downfall, but by the planet's sub prime banking system.
In short, banks and investment banks (especially) really screwed the pooch.
Collectively, they took too many unwarranted risks and didn't have the capital--that's actual money in the sock--to withstand a collapse of the consumer credit market, including trillions in saggy mortgages, home equity loans, credit cards and auto loans.
What's more, Roubini was the first to say the business model for the stand-alone investment bank was dead. With leverage ratios in excess of 30-to-1 (for every $30 borrowed it had one dollar in cash), investment banks like Bear Stearns and Lehman Brothers would not make it through the hard times.
The other high priests of finance--Goldman Sachs and Morgan Stanley--abandoned their investment banking purity to become more highly-regulated bank holding companies. Meanwhile, Merrill Lynch headed for the hills by merging with Bank of America.
Even as the economic crisis unfolded, Roubini's views were still greeted with deep skepticism. I recall a Charlie Rose show, where the good professor was treated like a skunk at a garden party because he predicted the demise of huge investment banks and stated the traditional banking system was in big trouble.He was also among the first to say the Bush Administration's bailout plan was full of beans. You may recall that the original idea, advocated by our high-handed Treasury Secretary Hank Paulson, primarily centered on the U.S. government buying toxic mortgage-backed assets from investment houses and banks.
A bad idea, argued Roubini.
Instead, he said, the government needed to stabilize the financial and lending system by pumping money directly into the major banks. With that additional capital, banks will rebuild. They'll provide loans to each other again, restore confidence in the credit markets, and make more commercial lending available to worthy credits, Roubini asserted.
Once an obscure academic, Roubini is now teaching before a much larger audience.
He's all over the financial news channels, is a recurring guest on PBS and Charlie Rose, and is in demand as a speaker. He also runs a consulting business.
Let's hope the limelight and success doesn't ruin Professor Roubini.
Right now, however, Roubini is staying true to his calling. He figures there's more carnage ahead for the banking system and financial markets. And he would like to see another stimulus package, worth about $400 billion, to jump start the economy because we're looking down the spout at a deep, two-year recession, he said.
Nobody wants to hear such gloomy predictions. But at least Dr. Doom knows what he's talking about.


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