“Crisis Economics: A Crash Course in the Future of Finance,” by Nouriel Roubini and Stephen Mihm
“In practice, we have seen that things that should have happened once every one hundred years are becoming much more frequent and are much more virulent. The economic cost, job losses and the fiscal cost of these crises have become larger and larger.”-Nouriel Roubini
NOURIEL ROUBINI AND STEP- hen Mihm blend historic analysis and global economic theories in an effort to get their readers to face a long-neglected truth: In the history of modern capitalism, crises are the norm, not the exception — “irrational exuberance,” followed by “pervasive despondency.”
They explain how global commerce and interdependent financial institutions today can spread local contagions into worldwide conflagrations. Roubini and Mihm argue that, unless we drastically change our financial policies of fiscal irresponsibility, we face a dark future.
Roubini is a professor of economics at New York University’s Stern School of Business. Foreign Policy in 2008 named him one of the Top 100 Public Intellectuals in the world for his prescient prediction of the 2008 financial meltdown. Stephen Mihm is an associate professor of history at the University of Georgia.
“Crisis Economics” explains succinctly how the global financial system went into a downward spiral in the fall of 2008 as a consequence of government mistakes over an extended time. It says that the government:
Failed to regulate new financial products like derivatives.
Swept away banking regulations that separated commercial from investment banks.
Encouraged concentration into a handful of “too big to fail” institutions.
Failed to regulate the vast shadow banking system, which consists of intermediaries between investors and borrowers, such as investment banks, hedge funds and non-bank financial institutions.
In addition, the pro cyclical policies of the Federal Reserve encouraged excessive leverage and risk by financial institutions.
To prevent a Depression 2.0 and save capitalism, the United States became a lender of last resort. We threw trillion dollar lifelines of liquidity to many types of financial institutions aside from commercial banks — insurance companies, money market funds and financial subsidiaries of manufacturers. We became shareholders in a host of businesses. The upcoming financial regulation and ObamaCare represent the most significant domestic legislation initiatives since the New Deal. Federal expenditures now represent 25 percent of the American economy.
Roubini and Mihm point out that the unprecedented expenditures that America has experienced since 2008 have left long-term legacy costs that will undermine future real economic growth.
How does America avoid a fiscal train wreck in the near future? Roubini and Mihm say we must:
Make deep and meaningful reforms to our subprime financial system.
Develop more consolidated and centralized regulatory framework in place of our crazy quilt of overlapping regulatory agencies.”
Raise taxes and cut spending. In 2009, the U.S. government had revenues of $2.5 trillion and spent $3.8 trillion. Raising revenue by 50 percent or cutting expenses by 33 percent would be hugely difficult.
What is the inescapable truth we need to accept for global economic tranquility? Long-term reforms will require greater coordination among the leading central banks of the major economic countries. Global economic governance now must include new players such as China, India and Brazil. We need their help to control the risky behavior of “too big to fail” entities, such as sovereign governments, commercial banks and hedge funds.
In an interview with CNBC on May 21, Roubini confirmed his apocalyptic mantle of “Dr. Doom.” He bemoaned the trillion dollar bailout out of Greece and, potentially, other euro-zone countries. The bailout failed to address core problems such as Greece’s bloated federal bureaucracy and financially irresponsible entitlement programs.
The euro zone economic crisis requires pervasive and systemic fixes, not simplistic solutions. Roubini argued that the growing sovereign debt problem will mark the next phase of the global economic crisis, sparking a synchronized global depression.
Originally published in the Sarasota Herald-Tribune
