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Jan. 30 (Bloomberg) -- At the World Economic Forum two years ago, Nouriel Roubini warned that record profits and bonuses were obscuring a “hard landing” to come. “I really disagree,” countered Jacob Frenkel, the American International Group Inc. vice chairman and former Israeli central banker.
No more. “Roubini was intellectually courageous, and he called the shots correctly,” says Frenkel, whose AIG survives only on the basis of more than $100 billion of government loans. “He gained credibility, and he deserves it.”
This week, New York University’s Roubini returned to the WEF and the Swiss ski resort of Davos as the prophet of the worst economic and financial crisis since the Great Depression - - joining the ranks of previous “Dr. Dooms” who made their names through contrarian calls that proved correct.
Even as he wins plaudits for his prescience, Roubini, 50, says worse lies ahead. Banks face bigger credit losses than they realize, more financial companies will require state takeovers and the world economy will keep shrinking throughout 2009, he says.
“The consensus is catching up with me, but it’s still behind,” Roubini said in an interview in Davos. “I don’t know what some people are smoking.”
‘Catastrophic’
As long ago as February 2007, Roubini was writing on his blog that “the party will soon be over,” and warning of “painful consequences for the U.S. and the global economy.” By last February, his tone had become apocalyptic, raising the specter of a “catastrophic” meltdown that central banks would fail to prevent, triggering the bankruptcy of large banks with mortgage holdings and a “sharp drop” in equities.
The next month, Bear Stearns Cos. failed, to be taken over by JPMorgan Chase & Co. in a government-backed deal. Then, in September, Lehman Brothers Holdings Inc. went bankrupt, prompting banks to hoard cash and depriving businesses and households of access to capital. The U.S. took over AIG, Fannie Mae and Freddie Mac, and the Standard & Poor’s 500 Index suffered its worst year since 1937.
“I was intellectually vindicated,” Roubini says. “But I was vindicated by having an economic disaster which has political and social consequences.”
Predecessors
Roubini’s predecessors in the role of economic nay-sayer include some well-known names: Joseph Granville, publisher of the Granville Market Letter, who forecast the stock-market declines of 1976 and 2000; Henry Kaufman, who as a managing director at Salomon Brothers projected rising interest rates that led to a U.S. recession in the early 1980s; Marc Faber, publisher of the Gloom, Boom & Doom Report, who predicted the 1987 stock crash; and Yale University’s Robert Shiller, a former colleague of Roubini’s, who forecast the end of the dot-com bubble in his 2000 book “Irrational Exuberance” and said in a second edition in 2005 that the U.S. housing market had undergone the biggest speculative boom in U.S. history.
Granville, 85, says the key to being an outlier is not to doubt your analysis.
“I don’t have anything to do with emotion,” says Granville, who’s based in Kansas City. “Keep your head, follow the numbers and ignore the rest.”
Roubini was born in Istanbul, the son of an importer- exporter of carpets, and spent his childhood in Israel, Iran and Italy. It was while living in Milan from 1962 to 1982, he says, that he became attracted to economics: “Economics had the tools to understand the world, and not just understand it but also change it for the better.”
International Economics
After a year at the Hebrew University of Jerusalem, he earned an economics degree at Milan’s Universita’ L. Bocconi and then his Ph.D. at Harvard University in 1988, where he specialized in international economics.
Jeffrey Sachs, he says, became his “role model” at Harvard by demonstrating that economists could shape public policy -- as Sachs did by lobbying for poor countries to have their debts relieved by richer governments. Sachs is now a professor at Columbia University.
“You sensed there was something beyond academia, that you have to figure out the big issues of the global economy,” says Roubini. “You have to be engaged, and can’t just be in an ivory tower.”
For much of the 1990s, Roubini combined academic research and policy-making by teaching at Yale and then in New York, while also spending time at the International Monetary Fund, the Federal Reserve, World Bank and Bank of Israel.
Joining Clinton
By 1998 he had attracted the attention of President Bill Clinton’s administration, joining it first as a senior economist in the White House Council of Economic Advisers and then moving to the Treasury department as a senior adviser to Timothy Geithner, then the undersecretary for international affairs and now Treasury secretary in the Obama administration.
Roubini returned to the IMF in 2001 as a visiting scholar while it battled a financial meltdown in Argentina. He co-wrote a book on saving bankrupt economies entitled “Bailouts or Bail- ins?” and opened his own global consulting firm, which now employs two dozen economists and publishes a popular Web site and blog.
“Nouriel has a rare combination of economics and the real world, and so has great insight because of that,” says Shiller. “He looks into the details and rolls up his sleeves.”
Roubini says working on emerging-market blowouts in Asia and Latin America allowed him to spot the looming disaster in the U.S. “I’ve been studying emerging markets for 20 years, and saw the same signs in the U.S. that I saw in them, which was that we were in a massive credit bubble,” he says.
Still a Pessimist
With that bubble now popped, Roubini remains more pessimistic than economists elsewhere. The IMF forecasts global growth of 0.5 percent this year and bank losses from toxic U.S.- originated assets of $2.2 trillion. By contrast, Roubini sees the global economy shrinking this year, and banks writing down at least $3.6 trillion -- compared to the $1.1 trillion disclosed so far.
While the U.S. government is resisting nationalizing its biggest banks, Roubini says it will have no choice because they are now “effectively insolvent.” And the outcome may be even worse than even he anticipates if governments fail to take aggressive steps to recapitalize banks and revive their economies, he says: “The risk of a near-depression shouldn’t be underestimated.”
Roubini, who’s now working on a book about the crisis, says he takes no particular pleasure in his role as Dr. Doom or the attention it brings him.
“I’m not a permanent bear,” he says. “I’ll be the first to call a recovery, but I just don’t see it yet, and it’s getting uglier.”
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