Nouriel Roubini: The Exit Strategy

[Winehole23]

Nouriel Roubini

Desperately seeking an exit strategy

Anthony Jenkins/The Globe and Mail

Getting the plan right is crucial. Errors would heighten the threat of a double-dip recession




Nouriel Roubini


From Wednesday's Globe and Mail Last updated on Friday, Sep. 18, 2009 03:23AM EDT



There's a general consensus that the massive monetary easing, fiscal stimulus and support of the financial system undertaken by governments and central banks around the world prevented the deep recession of 2008-2009 from devolving into the Second Great Depression.


Policy-makers were able to avoid a depression because they had learned from the policy mistakes made during the Great Depression of the 1930s and Japan's near depression of the 1990s. As a result, policy debates have shifted to arguments about what the recovery will look like: V-shaped (rapid return to potential growth), U-shaped (slow and anemic growth) or even W-shaped (a double dip). During the global economic free fall between last fall and this spring, an L-shaped economic and financial Armageddon was still firmly in the mix of plausible scenarios.


But the crucial policy issue ahead is how to time and sequence the exit strategy from this massive monetary and fiscal easing. Clearly, the current fiscal path being pursued in most advanced economies – the reliance of the United States, the euro zone, the United Kingdom, Japan and others on very large budget deficits and rapid ac ulation of public debt – is unsustainable.


These deficits have been partly monetized by central banks, which, in many countries, have pushed their interest rates down to 0 per cent (in Sweden's case, to below that), and sharply increased the monetary base through unconventional quan ative and credit easing. In the United States, for example, the monetary base more than doubled in a year.


If not reversed, this combination of very loose fiscal and monetary policy will lead to a fiscal crisis and runaway inflation, together with another dangerous asset and credit bubble. So the key issue for policy-makers is to decide when to mop up the excess liquidity and normalize policy rates – and when to raise taxes and cut government spending, and in which combination.


The biggest policy risk is that the exit strategy from monetary and fiscal easing is somehow botched, because policy-makers are damned if they do and damned if they don't. If they have built up large, monetized fiscal deficits, they should raise taxes, reduce spending and mop up excess liquidity sooner rather than later.


The problem is that most economies are now barely bottoming out, so reversing the fiscal and monetary stimulus too soon – before private demand has recovered more robustly – could tip these economies back into deflation and recession. Japan made that mistake between 1998 and 2000, just as the United States did between 1937 and 1939.


But if governments maintain large budget deficits and continue to monetize them as they have been doing, at some point – after the current deflationary forces become more subdued – bond markets will revolt. When that happens, inflationary expectations will mount, long-term government bond yields will rise, mortgage rates and private market rates will increase, and one would end up with stagflation (inflation and recession).


So how should we square the policy circle?


First, different countries have different capacities to sustain public debt, depending on their initial deficit levels, existing debt burden, payment history and policy credibility. Smaller economies – like some in Europe – that have large deficits, growing public debt and banks that are too big to fail and too big to be saved may need fiscal adjustment sooner to avoid failed auctions, rating downgrades and risk of a public-finance crisis.


Second, if policy-makers credibly commit to raise taxes and reduce public spending (especially en lement spending), say, in 2011 and beyond, when the economic recovery is more resilient, the gain in market confidence would allow a looser fiscal policy to support recovery in the short run.
Third, monetary policy authorities should specify the criteria they will use to decide when to reverse quan ative easing, and when and how fast to normalize policy rates. Even if monetary easing is phased out later rather than sooner – when the recovery is more robust – markets and investors need clarity in advance on the parameters that will determine the timing and speed of the exit. Preventing another asset and credit bubble by including the price of assets such as housing in determining monetary policy is also important.


Getting the exit strategy right is crucial: Serious policy mistakes would significantly heighten the threat of a double-dip recession. Moreover, the risk of such a mistake is high, because the political economy of countries such as the United States may lead officials to postpone tough choices about unsustainable fiscal deficits.


In particular, the temptation for governments to use inflation to reduce the real value of public and private debts may become overwhelming. In countries where asking a legislature for tax increases and spending cuts is politically difficult, monetization of deficits and eventual inflation may become the path of least resistance.

[boutons_deux]

I read an article where the Fed essentially owns the US economics profession, employing 100s of economist directly, and putting out contracts and work to 1000s of other economists.

If you are a career economist in US, you will not contradict the Fed if you want to work, have recognition, advance your career.

Sorta answers how 1000s of econmists were silent or effete as the Fed lied about "no bubble" and all is cool, "banks are responsible and self-regulating", and didn't predict the casino/bankster economic disaster.

Roubini was one of the very few who got the predicted the bubble precisely.

[MannyIsGod]

There's a general consensus that the massive monetary easing, fiscal stimulus and support of the financial system undertaken by governments and central banks around the world prevented the deep recession of 2008-2009 from devolving into the Second Great Depression.


Policy-makers were able to avoid a depression because they had learned from the policy mistakes made during the Great Depression of the 1930s and Japan's near depression of the 1990s. As a result, policy debates have shifted to arguments about what the recovery will look like: V-shaped (rapid return to potential growth), U-shaped (slow and anemic growth) or even W-shaped (a double dip). During the global economic free fall between last fall and this spring, an L-shaped economic and financial Armageddon was still firmly in the mix of plausible scenarios.

Someone tell the opposition in DC (and around the country for that matter) because they're not part of this consensus. They still envision whats going on as the Obama led takeover of the world.

[Winehole23]

It could still lead to us being in hock to our financial masters forever.

Even supposing the specter of debt deflation has been decisively turned back (a big if, IMO), the ground has been prepared for oligarchic interests to become even more decisively too big to fail, and to take even bigger risks in the future.

We're not out of the woods yet.

[2centsworth]

I like Dr. Doom. If you read between the lines he's essentially stating destruction is inevitable.

[nuclearfm]

The best way to do this would just to flat out leave. Our interference in the region just has caused more problems. If their populations want change, they should rise up (likely toss Islam aside, just as the founding fathers creating a Church free state here) and do it themselves.

We could send a few food drops in, red cross, etc. But that's it. Let them live their lives without us.

[mogrovejo]

The best way to do this would just to flat out leave. Our interference in the region just has caused more problems. If their populations want change, they should rise up (likely toss Islam aside, just as the founding fathers creating a Church free state here) and do it themselves.

We could send a few food drops in, red cross, etc. But that's it. Let them live their lives without us.

You clearly didn't read the article, but I do agree with this exit strategy. The sooner the government exits, the better.

[Winehole23]

+1

[Nbadan]

The best way to do this would just to flat out leave. Our interference in the region just has caused more problems. If their populations want change, they should rise up (likely toss Islam aside, just as the founding fathers creating a Church free state here) and do it themselves.

We could send a few food drops in, red cross, etc. But that's it. Let them live their lives without us.

I thought he was talking about leaving the country cause of debt....

[SouthernFried]

This guy is an idiot. Talks as if govt operates in a vacuum. "If govt just raises taxes and cuts spending...blah, blah, blah.."

Most "economists" I've talked to, or taken courses from were basically idiots. Put 10 of them in a room, and you get 10 different versions of whatever they're disussing. The ultimate..."If this happens, then this should happen, which should result in this." If "economists" knew what they were doing, Countries that use them (pretty much every country) would have no problems...but, they all do.

If you raise taxes on an over-taxed population already, will that bring in more money? Or will it reduce the activity that actually produces those taxes. I.E., tax anything...and people do less of it. Tax productivity, and you see less of it. Which is a main ingredient of why we're in the mess we're in.

The debt and deficits we have now, that affect so much, haven't resulted because people are taxed too little. It has resulted because people are taxed too much, and the resulting productivity flight away from areas that increase the burden of that productivity. Basically, the people dependent on producivity to fund themeselves (all govts), have de-insentivized that productivity...from being productive.

But all this idiot see's is..."if we can raise taxes and decrease spending...govt monetary and fiscal policies have a chance, and may stop, or not, recession/depression...blah, blah, blah."

He's got the cutting spending down right. But, the guy seems to know all about how the true mechanisms of productivity and its relationship to govt funding and spending really take place. In fact...he ignores it completely. As if Govt operates in a vacuum outside of it. Typical of the morons I spent too many yrs listening to. They know about how real marketplaces and business's run...and live in books, politics, and academia.

And they didn't learn about the great depression either.

...

[Winehole23]

How do we pay off our massive public debt, or fulfill unfunded liabilities like medicare and social security without raising taxes and cutting spending?

Inflating our way out of it ain't gonna work.

[Winehole23]

There's also the matter of financial confidence. We can't get it back until we put our fiscal house back in order. That means tightening our belt and starting to pay down the debt.

[doobs]

The best way to do this would just to flat out leave. Our interference in the region just has caused more problems. If their populations want change, they should rise up (likely toss Islam aside, just as the founding fathers creating a Church free state here) and do it themselves.

We could send a few food drops in, red cross, etc. But that's it. Let them live their lives without us.

So . . . have you read the article since you posted this?

[nuclearfm]

So . . . have you read the article since you posted this?

Yeah my fault. Banish me.

[SouthernFried]

If govt wants to really raise revenue...if they are "REALLY" interested in paying off the debt. Then you do NOT raise taxes on the people your relying on to actually pay it...producers and productivity.

That is the surest way to decrease the activity you want to increase (if, in fact you really want to increase productivity.) Productivity and Producers are what pays for everything govt does.

If you want a business to come to San Antonio...you don't offer them tax increases...you offer them tax abatements, or decreases.

If you want business to flourish in the US, you don't increase their tax burdens...you decrease it. You'll get more activity and more business in both the San Antonio and US tax reduction scenarios and People making more money.

Tax 50% of nothing...you get nothing. Tax 10% of something...you get something

That's how you increase revenue for govt crap. lol

[starboy]

This guy is an idiot. Talks as if govt operates in a vacuum. "If govt just raises taxes and cuts spending...blah, blah, blah.."

LOL you called Nouriel Roubini an idiot.

Most "economists" I've talked to, or taken courses from were basically idiots. Put 10 of them in a room, and you get 10 different versions of whatever they're disussing. The ultimate..."If this happens, then this should happen, which should result in this." If "economists" knew what they were doing, Countries that use them (pretty much every country) would have no problems...but, they all do.

ugh...okay I guess.

If you raise taxes on an over-taxed population already, will that bring in more money? Or will it reduce the activity that actually produces those taxes. I.E., tax anything...and people do less of it. Tax productivity, and you see less of it. Which is a main ingredient of why we're in the mess we're in.

Okay, who says we're over-taxed? Also, you really really REALLY simplify the effect tax has on people. It could just be me, but I'm 99% sure it's slightly more complicated than "tax producticity, and you see less of it".

The debt and deficits we have now, that affect so much, haven't resulted because people are taxed too little. It has resulted because people are taxed too much, and the resulting productivity flight away from areas that increase the burden of that productivity. Basically, the people dependent on producivity to fund themeselves (all govts), have de-insentivized that productivity...from being productive.

reading comprehension > you...seriously.

The article NEVER said the debt and deficits we have now resulted because people were taxed too little, in fact it never even discusses why/how this depression started.

But all this idiot see's is..."if we can raise taxes and decrease spending...govt monetary and fiscal policies have a chance, and may stop, or not, recession/depression...blah, blah, blah."

Once again...reading comprehension>you.

You seriously missed the point of the article, so I can help break it down:


The USA economy went into a storm in 2007.
In 2009, the storm is finally starting to slow.
However, in order to slow the storm, the U.S. government had to A) spend loads of money, B) lower tax and interest rates(near 0%) to get people spending again.

Because of A and B, the government is racking up debt and operating inefficiently. If it continues to operate by spending laods of money and keep interest/tax rates re ed low, inflation will surely occur, and the U.S. economy may never start to grow again or go back into a recession.

ENTER THE ARTICLE!!!!!

Now, Noriel Roubini is talking about how/when the government should go back to it's normal operating self(i.e. not throwing money around and keeping interest rates near 0).

He's got the cutting spending down right. But, the guy seems to know all about how the true mechanisms of productivity and its relationship to govt funding and spending really take place. In fact...he ignores it completely. As if Govt operates in a vacuum outside of it. Typical of the morons I spent too many yrs listening to. They know about how real marketplaces and business's run...and live in books, politics, and academia.

And they didn't learn about the great depression either.

...

You have it all figured out...

[SnakeBoy]

This guy is an idiot.

I think he probably got used to being called that a few years ago.

Dr. Doom
Published: August 15, 2008
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 ins utions 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....
http://www.nytimes.com/2008/08/17/ma...ssimist-t.html

[SouthernFried]

lol...gee, he figured a "crisis was brewing in 2007"...too funny.

Any idiot could see exactly this scenario coming 30 yrs ago. And many...many did. Doesn't take an "economist" to figure out that spending more than your taking in is going to cause a problem that will catch up with you. It's been coming a very long time. Glad he finally figured it out in 2007.

And the following stupidity is the type of thinking that has gotten the US govt into this " hole."

I quote:

However, in order to slow the storm, the U.S. government had to A) spend loads of money, B) lower tax and interest rates(near 0%) to get people spending again.

Because of A and B, the government is racking up debt and operating inefficiently. If it continues to operate by spending laods of money and keep interest/tax rates re ed low

Christ, what moron get's himself into more debt than he can ever possibly hope to pay off in 2 lifetimes, and then decides that to get himself out of this debt, he's gotta "spend loads of money?" Which is also the stupidity that prolonged the FDR's depression.

Govt isn't the source of productivity in this country...it's the producers who fund govt. Govt spending doesn't promote productivity, it hurts it.

The best way govt can help producers, produce...is to quit spending and taxing them so much. The more govt spends, the more it has to take from producers. The whole thinking that govt has to spend to promote production in this country..is ass backwards thinking that prolonged the Depression (until ww2) came around...and is hurting recovery right now.

GOVT slowing spending and taking less from producers, is what enables productivity...not the opposite. This guy in the article is an idiot.

However, the real stupidity in your statement is underlined in your quote. Who the has lowered tax rates to near 0%?

But, then you completely trump the stupidity of that statement, with this one....

Okay, who says we're over-taxed?

lol.

No one, son. No one.

[starboy]

Govt isn't the source of productivity in this country...it's the producers who fund govt. Govt spending doesn't promote productivity, it hurts it.

Okay, you obviously haven't been paying attention to ANYTHING that has happened in the last 3 years.


The best way govt can help producers, produce...is to quit spending and taxing them so much.

Why do youu still insist on making the problem soooooooo simple?

I'm done with you, I can already see your next response:

"But you don't understand, the gov't just needs to make tax 0%, it also needs to have interest rates at 0%. In fact, why even have a government? The absolutely only thing the government does is things up by taxing us producers. We produce, and the government takes takes takes. SOOOO SIIIIMMMPPLLLEEEEE"!

[Shastafarian]

lol...gee, he figured a "crisis was brewing in 2007"...too funny.

Any idiot could see exactly this scenario coming 30 yrs ago. And many...many did. Doesn't take an "economist" to figure out that spending more than your taking in is going to cause a problem that will catch up with you. It's been coming a very long time. Glad he finally figured it out in 2007.

Did you start warning people before 2007? And if so many people knew, why did they allow it to happen? You're obviously so smart you can enlighten us.

[SouthernFried]

Did you start warning people before 2007? And if so many people knew, why did they allow it to happen? You're obviously so smart you can enlighten us.

Your right...

Nobody warned anyone about govt spending too much, govt debt and deficits and its affect on the economy... before this genius did in 2007.

[Shastafarian]

Your right...

I guess you're not that much of a genius.

Nobody warned anyone about govt spending too much, govt debt and deficits and its affect on the economy... before this genius did in 2007.

He laid out specific of what would happen. It wasn't generic republican regurgitated bull . Oh wait, it was a Republican administration that was spending too much. Lawlerskates.

[SouthernFried]

Ayup...govt spent too much, deficits rose, debt rose, productivity went down, unemployment goes up, housing markets slump...

and this genius predicted it all!

truely amazing.

[spursncowboys]

[Shastafarian]

Ayup...govt spent too much, deficits rose, debt rose, productivity went down, unemployment goes up, housing markets slump...

and this genius predicted it all!

truely amazing.

"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."

Can you find anyone else who predicted this?