As the optimists’ delusional hopes for a rapid V-shaped recovery evaporate, the advanced world will be at best in a long U-shaped recovery, which in some cases – the eurozone and Japan – may be long enough to stretch into an L-shaped near-depression. Avoiding double dip recession will be difficult.
In such a world, recovery in the stronger emerging markets – the great hope for the global economy – will suffer, because no country is an island economically. Indeed, growth in many emerging-market economies – starting with China – is highly dependent on retrenching advanced economies.
Fasten your seat belts for a very bumpy ride.
Related ETFs: iShares FTSE/Xinhua China 25 Index (ETF) (NYSE:FXI), PowerShares Gold Dagonrg USX China (ETF) (NYSE:PGJ) , Morgan Stanley China A Share Fund, Inc. (NYSE:CAF), iShares MSCI Japan Index (ETF) (NYSE:EWJ)
Aug 16, 2010
At Best We Face A Protracted Period Of Anemic Growth
The global economy, artificially boosted since the recession of 2008-2009 by massive monetary and fiscal stimulus and financial bailouts, is headed towards a sharp slowdown this year as the effect of these measures wanes. Worse yet, the fundamental excesses that fueled the crisis – too much debt and leverage in the private sector (households, banks and other financial institutions, and even much of the corporate sector) – have not been addressed.
Private-sector deleveraging has barely begun. Moreover, there is now massive re-leveraging of the public sector in advanced economies, with huge budget deficits and public-debt accumulation driven by automatic stabilizers, counter-cyclical Keynesian fiscal stimulus, and the immense costs of socializing the financial system’s losses.
At best, we face a protracted period of anemic, below-trend growth in advanced economies as deleveraging by households, financial institutions, and governments starts to feed through to consumption and investment. At the global level, the countries that spent too much – the United States, the United Kingdom, Spain, Greece, and elsewhere – now need to deleverage and are spending, consuming, and importing less.
Private-sector deleveraging has barely begun. Moreover, there is now massive re-leveraging of the public sector in advanced economies, with huge budget deficits and public-debt accumulation driven by automatic stabilizers, counter-cyclical Keynesian fiscal stimulus, and the immense costs of socializing the financial system’s losses.
At best, we face a protracted period of anemic, below-trend growth in advanced economies as deleveraging by households, financial institutions, and governments starts to feed through to consumption and investment. At the global level, the countries that spent too much – the United States, the United Kingdom, Spain, Greece, and elsewhere – now need to deleverage and are spending, consuming, and importing less.
Gordon Gekko Reborn
In the 1987 film Wall Street, the character Gordon Gekko famously declared, “Greed is good.” His creed became the ethos of a decade of corporate and financial-sector excesses that ended in the late 1980’s collapse of the junk-bond market and the Savings & Loan crisis. Gekko himself was packed off to prison.
A generation later, the sequel to Wall Street – to be released next month – sees Gekko released from jail and returned to the financial world. His reappearance comes just as the credit bubble fueled by the sub-prime mortgage boom is about to burst, triggering the worst financial and economic crisis since the Great Depression.
The “Greed is good” mentality is a regular feature of financial crises. But were the traders and bankers of the sub-prime saga more greedy, arrogant, and immoral than the Gekkos of the 1980’s? Not really, because greed and amorality in financial markets have been common throughout the ages.
Teaching morality and values in business schools will not tame such behavior, but changing the incentives that reward short-term profits and lead bankers and traders to take excessive risks will. The bankers and traders of the latest crisis responded rationally to compensation and bonus schemes that allowed them to assume a lot of leverage and ensured large bonuses, but that were almost guaranteed to bankrupt a large number of financial institutions in the end.
To avoid such excesses, it is not enough to rely on better regulation and supervision, for three reasons:
· Smart and greedy bankers and traders will always find ways to circumvent new rules;
· CEOs and boards of directors of financial firms – let alone regulators and supervisors – cannot effectively monitor the risks and behaviors of thousands of separate profit and loss centers in a firm, as each trader and banker is a separate P&L with its own capital at risk;
· CEOs and boards are themselves subject to major conflicts of interest, because they don’t represent the true interest of their firms’ ultimate shareholders.
As a result, any reform of regulation and supervision will fail to control bubbles and excesses unless several other fundamental aspects of the financial system are changed.
First, compensation schemes must be radically altered through regulation, as banks will not do it themselves for fear of losing talented people to competitors. In particular, bonuses based on medium-term results of risky trades and investments must supplant bonuses based on short-term outcomes.
Second, repeal of the Glass-Steagall Act, which separated commercial and investment banking, was a mistake. The old model of private partnerships – in which partners had an incentive to monitor each other to avoid reckless investments – gave way to one of public companies aggressively competing with each other and with commercial banks to achieve ever-rising profitability, which was achievable only with reckless levels of leverage.
Similarly, the move from a lending model of “originate and hold” to one of “originate and distribute” based on securitization led to a massive transfer of risk. No player but the last in the securitization chain was exposed to the ultimate credit risk; the rest simply raked in high fees and commissions.
Third, financial markets and financial firms have become a nexus of conflicts of interest that must be unwound. These conflicts are inbuilt, because firms that engage in commercial banking, investment banking, proprietary trading, market making and dealing, insurance, asset management, private equity, hedge-fund activities, and other services are on every side of every deal (the recent case of Goldman Sachs was just the tip of the iceberg).
There are also massive agency problems in the financial system, because principals (such as shareholders) cannot properly monitor the actions of agents (CEOs, managers, traders, bankers) that pursue their own interest. Moreover, the problem is not just that long-term shareholders are shafted by greedy short-term agents; even the shareholders have agency problems. If financial institutions do not have enough capital, and shareholders don’t have enough of their own skin in the game, they will push CEOs and bankers to take on too much leverage and risks, because their own net worth is not at stake.
At the same time, there is a double agency problem, as the ultimate shareholders – individual shareholders – don’t directly control boards and CEOs. These shareholders are represented by institutional investors (pension funds, etc.) whose interests, agendas, and cozy relationships often align them more closely with firms’ CEOs and managers. Thus, repeated financial crises are also the result of a failed system of corporate governance.
Fourth, greed cannot be controlled by any appeal to morality and values. Greed has to be controlled by fear of loss, which derives from knowledge that the reckless institutions and agents will not be bailed out. The systematic bailouts of the latest crisis – however necessary to avoid a global meltdown – worsened this moral-hazard problem. Not only were “too big to fail” financial institutions bailed out, but the distortion has become worse as these institutions have become – via financial-sector consolidation – even bigger. If an institution is too big to fail, it is too big and should be broken up.
Unless we make these radical reforms, new Gordon Gekkos – and Charles Ponzis – will emerge. For each chastised and born-again Gekko – as the Gekko in the new Wall Street is – hundreds of meaner and greedier ones will be born.
in project-syndicate.org
A generation later, the sequel to Wall Street – to be released next month – sees Gekko released from jail and returned to the financial world. His reappearance comes just as the credit bubble fueled by the sub-prime mortgage boom is about to burst, triggering the worst financial and economic crisis since the Great Depression.
The “Greed is good” mentality is a regular feature of financial crises. But were the traders and bankers of the sub-prime saga more greedy, arrogant, and immoral than the Gekkos of the 1980’s? Not really, because greed and amorality in financial markets have been common throughout the ages.
Teaching morality and values in business schools will not tame such behavior, but changing the incentives that reward short-term profits and lead bankers and traders to take excessive risks will. The bankers and traders of the latest crisis responded rationally to compensation and bonus schemes that allowed them to assume a lot of leverage and ensured large bonuses, but that were almost guaranteed to bankrupt a large number of financial institutions in the end.
To avoid such excesses, it is not enough to rely on better regulation and supervision, for three reasons:
· Smart and greedy bankers and traders will always find ways to circumvent new rules;
· CEOs and boards of directors of financial firms – let alone regulators and supervisors – cannot effectively monitor the risks and behaviors of thousands of separate profit and loss centers in a firm, as each trader and banker is a separate P&L with its own capital at risk;
· CEOs and boards are themselves subject to major conflicts of interest, because they don’t represent the true interest of their firms’ ultimate shareholders.
As a result, any reform of regulation and supervision will fail to control bubbles and excesses unless several other fundamental aspects of the financial system are changed.
First, compensation schemes must be radically altered through regulation, as banks will not do it themselves for fear of losing talented people to competitors. In particular, bonuses based on medium-term results of risky trades and investments must supplant bonuses based on short-term outcomes.
Second, repeal of the Glass-Steagall Act, which separated commercial and investment banking, was a mistake. The old model of private partnerships – in which partners had an incentive to monitor each other to avoid reckless investments – gave way to one of public companies aggressively competing with each other and with commercial banks to achieve ever-rising profitability, which was achievable only with reckless levels of leverage.
Similarly, the move from a lending model of “originate and hold” to one of “originate and distribute” based on securitization led to a massive transfer of risk. No player but the last in the securitization chain was exposed to the ultimate credit risk; the rest simply raked in high fees and commissions.
Third, financial markets and financial firms have become a nexus of conflicts of interest that must be unwound. These conflicts are inbuilt, because firms that engage in commercial banking, investment banking, proprietary trading, market making and dealing, insurance, asset management, private equity, hedge-fund activities, and other services are on every side of every deal (the recent case of Goldman Sachs was just the tip of the iceberg).
There are also massive agency problems in the financial system, because principals (such as shareholders) cannot properly monitor the actions of agents (CEOs, managers, traders, bankers) that pursue their own interest. Moreover, the problem is not just that long-term shareholders are shafted by greedy short-term agents; even the shareholders have agency problems. If financial institutions do not have enough capital, and shareholders don’t have enough of their own skin in the game, they will push CEOs and bankers to take on too much leverage and risks, because their own net worth is not at stake.
At the same time, there is a double agency problem, as the ultimate shareholders – individual shareholders – don’t directly control boards and CEOs. These shareholders are represented by institutional investors (pension funds, etc.) whose interests, agendas, and cozy relationships often align them more closely with firms’ CEOs and managers. Thus, repeated financial crises are also the result of a failed system of corporate governance.
Fourth, greed cannot be controlled by any appeal to morality and values. Greed has to be controlled by fear of loss, which derives from knowledge that the reckless institutions and agents will not be bailed out. The systematic bailouts of the latest crisis – however necessary to avoid a global meltdown – worsened this moral-hazard problem. Not only were “too big to fail” financial institutions bailed out, but the distortion has become worse as these institutions have become – via financial-sector consolidation – even bigger. If an institution is too big to fail, it is too big and should be broken up.
Unless we make these radical reforms, new Gordon Gekkos – and Charles Ponzis – will emerge. For each chastised and born-again Gekko – as the Gekko in the new Wall Street is – hundreds of meaner and greedier ones will be born.
in project-syndicate.org
Aug 12, 2010
Video Interview: The Economist
Latest video interview, August 2010
Topics: America's banking reforms, the risk of deflation in advanced economies and China's growth
Related ETFs:Financial Select Sector SPDR (ETF) (Public, NYSE:XLF), Direxion Daily Finan. Bear 3X Shs(ETF) (Public, NYSE:FAZ), Direxion Daily Finan. Bull 3X Shs(ETF) (Public, NYSE:FAS)
Related stocks: Bank of America Corporation (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), Goldman Sachs Group, Inc. ( NYSE:GS), Morgan Stanley (NYSE:MS), Citigroup Inc. (NYSE:C), Fifth Third Bancorp (NASDAQ:FITB), SunTrust Banks, Inc. (Public, NYSE:STI), Regions Financial Corporation (NYSE:RF)
Aug 11, 2010
China`s Slowdown
The slowdown in China’s economy looks to have continued in July, with industrial production, exports and investment all decelerating as RGE has been anticipating. Meanwhile, massive flooding and expectations for a weak fall harvest pushed up food prices, likely tipping the CPI back above the central bank’s 3% comfort level.
in RGE
Related: iShares FTSE/Xinhua China 25 Index (ETF) (NYSE:FXI), PowerShares Gold Dagonrg USX China (ETF) (NYSE:PGJ) , Morgan Stanley China A Share Fund, Inc. (NYSE:CAF)
in RGE
Related: iShares FTSE/Xinhua China 25 Index (ETF) (NYSE:FXI), PowerShares Gold Dagonrg USX China (ETF) (NYSE:PGJ) , Morgan Stanley China A Share Fund, Inc. (NYSE:CAF)
Aug 9, 2010
Fed Meeting: We Do Not See Any Major Policy Moves Materializing This Week
We kick off our look at North America with the United States, where we dwell on the weak employment report last week. We expect that the dismal report will weigh on the minds of policymakers as they gather for the Federal Open Market Committee (FOMC) meeting this week. As we stated in the Q2 2010 outlook for the United States, we expect the Fed to step in and provide additional monetary stimulus. However, we do not see any major policy moves materializing this week, but we continue to look for further verbal signals regarding impending policy moves.
in RGE
Related ETFs: SPDR S&P 500 ETF (NYSE:SPY), SPDR Dow Jones Industrial Average ETF (NYSE:DIA), ProShares UltraShort S&P500 (ETF) (Public, NYSE:SDS), iShares Russell 2000 Index (ETF) (Public, NYSE:IWM)
in RGE
Related ETFs: SPDR S&P 500 ETF (NYSE:SPY), SPDR Dow Jones Industrial Average ETF (NYSE:DIA), ProShares UltraShort S&P500 (ETF) (Public, NYSE:SDS), iShares Russell 2000 Index (ETF) (Public, NYSE:IWM)
Aug 5, 2010
The Price Of Oil And The Mexican Peso
“The price of oil is creating a positive impetus for the peso. The market knows the central bank will intervene when the peso appreciates too quickly.”
Bertrand Delgado, a senior economist at Roubini Global Economics LLC, New York
Bertrand Delgado, a senior economist at Roubini Global Economics LLC, New York
Aug 4, 2010
Brazilian Monetary Policy: When Will The Tightning Cycle End?
In Brazil, the July 21 monetary policy minutes did not provide a clear signal about when the tightening cycle will end; however, the dovish and data-dependent tone indicates further hikes of a similar size to, or smaller than, that delivered in July.
Related ETF: iShares MSCI Brazil Index (ETF) (NYSE:EWZ)
in RGE
Related ETF: iShares MSCI Brazil Index (ETF) (NYSE:EWZ)
in RGE
US Stocks: Market Recap
U.S. stocks surrendered some of yesterday’s strong gains as weak data on personal income and spending and a drop in the pending home sales index, along with bleak earnings prospects from reporting consumer companies stoked fears that the economic recovery was losing momentum. Investors shunned risky assets and turned to the safety of US treasuries. Modest gains in July’s U.S. car sales also raised concerns about the health of the industry's recovery.
In earnings, 352 companies in the S&P 500 so far have reported, with 268, or 76%, beating the average estimates of analysts. Average estimates for earnings-per-share have been revised up slightly to US$20.70 from US$20.67, and actual EPS currently stands at US$20.53.
in RGE, by Tetiana Sears
In earnings, 352 companies in the S&P 500 so far have reported, with 268, or 76%, beating the average estimates of analysts. Average estimates for earnings-per-share have been revised up slightly to US$20.70 from US$20.67, and actual EPS currently stands at US$20.53.
in RGE, by Tetiana Sears
Jul 31, 2010
Japan: Economic Outlook
Japan's unemployment rate has been rising since end-Q1 2010—in other words, since the end of the cyclical export rebound. As Japan is really still only an industrial economy, not an information economy like the U.S. or eurozone, the downturn in exports means a slowdown in industrial production and hence employment growth.
in RGE
Related ETFs: iShares MSCI Japan Index (ETF) (Public, NYSE:EWJ),
in RGE
Related ETFs: iShares MSCI Japan Index (ETF) (Public, NYSE:EWJ),
Jul 29, 2010
Defaults And Official Support
"In situations of insolvency, official support not only fails to prevent the eventual default, but also exacerbates the trouble, causing more damage to the country and even to its creditors."
in Forbes
in Forbes
Jul 28, 2010
Oscillations In The Euro's Exchange Rate Against The Dollar
"It's been like a beauty contest where the issue is not who's the prettiest, but who's the least ugly"
Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of Roubini Global Economics
Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of Roubini Global Economics
The Difference Between 2.5% Growth And 1.5%
"Well, the potential growth is around 2.75-3%, so if we are at 2.5% probably you create enough jobs to stabilize the unemployment rate, but at 1.5% you have job losses, unemployment goes up (...) 2.5% is close to potential while 1.5% is about half as much as potential."
in CNBC
in CNBC
Jul 27, 2010
In the Second Half Of The Year It Will Feel like A Recession
“Certainly the second half of the year has to be worse. Less than 2% in second quarter is not a recession, but everything is worse. It feels like a recession.”
in CNBC
in CNBC
Jul 26, 2010
European Stress Tests: The Assumptions Are Not Realistic Enough
"The assumptions made about economic growth, about sovereign risk are not realistic enough"
in CNBC
in CNBC
Don`t Jump Into Gold
"The concerns propelling the price of gold specifically are very real and should not be ignored. But is now the time for investors to jump the gold bandwagon? We wouldn’t encourage it."
in Roubini Global Economics (RGE) clients note
Related ETFs: SPDR Gold Trust (ETF) (Public, NYSE:GLD), Market Vectors Gold Miners ETF (Public, NYSE:GDX)
in Roubini Global Economics (RGE) clients note
Related ETFs: SPDR Gold Trust (ETF) (Public, NYSE:GLD), Market Vectors Gold Miners ETF (Public, NYSE:GDX)
Jul 22, 2010
An Orderly Restructuring Of Greece Is Unavoidable
An orderly restructuring is unavoidable, desirable and viable in ways that benefit both the sovereign debtor and its creditors.
in CNN Money
in CNN Money
Jul 21, 2010
US Growth Will Slow To 1.5 Percent In The Second Half
"US growth will slow to 1.5 percent in the second half of 2010 and into 2011, the New York University economist wrote in the Australian Financial Review newspaper. The slowdown will feel like a recession, Roubini said.
The outlook for the euro zone is worse than the U.S. and growth may be close to zero by the end of the year, he wrote."
in Bloomberg
The outlook for the euro zone is worse than the U.S. and growth may be close to zero by the end of the year, he wrote."
in Bloomberg
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