[루비니의 "앵글로색슨 모델은 실패했다" 원문]
전세계 <FT> 독자들과 '세계경제위기' 쌍방향 대화
'닥터 둠' 누리엘 루비니 미 뉴욕대 교수는 9일(현지시간) 영국 <파이낸셜타임스(FT)>의 전세계 독자들의 질문에 직접 답하는 쌍방향 대화 형식을 빌어 지난 수십년간 세계 금융계를 지배해온 앵글로색슨 금융자본주의의 종언을 선언하며, 대형 상업은행들의 도산과 미국책-달러화 폭락을 예언했다. 다음은 루비니 교수가 공개한 쌍방향 대화 원문 전문. <편집자 주>
Roubini: Anglo-Saxon model has failed
The Anglo-Saxon model of supervision and regulation of the financial system has failed, Nouriel Roubini, chairman of RGE Monitor and professor of economics at New York University, told the Financial Times on Monday.
Answering questions from FT.com readers, Prof Roubini, who is widely credited with having predicted the current financial crisis, said the supervisory system “relied on self-regulation that, in effect, meant no regulation; on market discipline that does not exist when there is euphoria and irrational exuberance; on internal risk management models that fail because – as a former chief executive of Citi put it – when the music is playing you gotta stand up and dance.”
“All the pillars of Basel II have already failed even before being implemented,” he added, referring to the internationally agreed set of banking regulations that are forcing banks to set aside more capital to maintain their existing lending.
Prof Roubini also predicted that it was possible another large bank could fail, saying: “In many countries the banks may be too big to fail but also too big to save, as the fiscal/financial resources of the sovereign may not be large enough to rescue such large insolvencies in the financial system”.
He also criticised the US and UK approach to bank bail-outs, comparing it with attempts by Japan in the 1990s to solve its banking crisis. “The current US and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and credit freeze,” he said.
Economists and politicians hope to identify tentative signs of recovery in leading economies during the second half of 2009, as stimulus measures from governments and action on interest rates by central banks begin to kick in.
But recent data suggest it may take a little longer. Meanwhile, the World Economic Forum’s latest report warns of the risks of a fiscal crisis, created by the very government spending intended to rescue economies from the turmoil in the global financial system.
So, is the worst nearly over? Or is there still a way to go? Recently returned from Davos, Nouriel Roubini, chairman of RGE Monitor and professor of Economics at New York University, will answer readers’ questions on the outlook for the global economy and its impact on markets from 1400 GMT on Monday February 9.
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It is pretty much consensus now that 2009 will be a zero growth year for the world economy (something that you forecast well in advance). It seems that the major risk for the following years is having a lost decade of Japanese-style stagnation but on a worldwide basis. How are the governments in US and Europe faring so far in their effort to avoid that? Marco, Sao PauloNouriel
Roubini: To avoid a Japanese style multi-year L-shaped near-depression or stag-deflation (a deadly combination of stagnation, recession and deflation) the appropriate, coherent and credible combination of monetary easing (traditional and unorthodox), fiscal stimulus, proper clean-up of the financial system and reduction of the debt burden of insolvent private agents (households and non-financial companies) is necessary.The eurozone is well behind the US in its efforts as: a) the ECB is behind the curve in cutting policy rates and creating non-traditional facilities to deal with the liquidity and credit crunch; b) the fiscal stimulus is too modest as those who can afford it (Germany) are lukewarm about it and those who need it the most (Spain, Portugal, Greece, Italy) can least afford it as they already have large budget deficits; c) there is lack of cross-border burden sharing of the fiscal costs of bailing out financial institutions.The U.S. has done more (with its aggressive monetary easing and large fiscal stimulus putting it ahead) but two key elements are key to avoid a near-depression and still missing: a proper clean-up of the banking system that may require a proper triage between solvent and insolvent banks and the nationalization of many banks; and a more aggressive and across-the-board solution to the unsustainable debt burden of millions of insolvent households.Thus, I would say the L-shaped near-depression scenario is possible.
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How can Davos, a gathering of the greediest, most avaricious and incompetent people of the planet, ever fix any of the problems they have created in the first place, and hugely benefited from?. Do you agree that when the boom was at its height, you were mistreated there when you tried to draw attention on the looming crisis? Are you now afraid of being now co-opted by the system and losing your independence? Marcel Knecht, Villa Santiago, Mexico
NR: It is important to keep one’s intellectual rigor and honesty free from any financial conflict of interest (I never trade in markets and so I am never “talk my book” when I present my views).
I have kept my balanced and analytically rigorous but bearish view over time and adjusted my outlook only at the margin in light of the evolving circumstances.
But the basic thrust of my analysis and views about the severity of this financial and economic crisis – the worst since the Great Depression - has not changed.
I don’t think anyone could suggest that I have been co-opted by the system and lost my independence. If anything my concerns that a severe U-shaped global recession may turn into a worse, L-shaped near-depression have somewhat increased over time.
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It seems clear that governments will not allow their banking system to fail altogether and that they will intervene to rescue whenever needed. My question is: The governments will save the banks, but who will save the governments? Is it possible that we are about to see countries default? What does that mean for the global economy? Which countries are the ones who pose the greatest risk? Jonathan Arad
NR: In many countries the banks may be too-big-to-fail but also too- big-to-save, as the fiscal/financial resources of the sovereign may not be large enough to rescue such large insolvencies in the financial system.
Traditionally only emerging markets suffered – and still suffer - from such a problem. But now such sovereign risk – as measured by the sovereign spread - is also rising in many European economies whose banks may be larger than the ability of the sovereign to rescue them: Iceland, Greece, Spain, Italy, Belgium, Switzerland and, some suggest, even the UK.
The process of socializing the private losses from this crisis has already moved many of the liabilities of the private sector onto the books of the sovereign: banks, other financial institutions and, soon enough possibly, households and some important non-financial corporate companies.
At some point a sovereign bank may crack, in which case the ability of governments to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued.
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What level of oversight is now appropriate from the financial regulatory authorities? Do they need very large new measures or should they have a light touch? Ashok Soni
NR: It is clear that the Anglo-Saxon model of supervision and regulation of the financial system has failed.
It relied on self-regulation that, in effect, meant no regulation; on market discipline that does not exist when there is euphoria and irrational exuberance; on internal risk management models that fail because – as a former chief executive of Citi put it – when the music is playing you gotta stand up and dance.
Furthermore, the self-regulation approach created rating agencies that had massive conflicts of interest and a supervisory system dependent on principles rather than rules. This light-touch regulation in effect became regulation of the softest-touch.
Thus, all the pillars of Basel II have already failed even before being implemented.
Since the pendulum had swung too much in the direction of self-regulation and the principles-based approach, we now need more binding rules on liquidity, capital, leverage, transparency, compensation and so on...
But the design of the new system should be robust enough to counter three types of problems with rules:
A tendancy toward ‘regulatory arbitrage’ should be bourne in mind, as bankers can find creative ways to bypass rules faster than regulators can improve them.
Then there is ‘jurisdictional arbitrage’ as financial activity may move to more lax jurisdictions.
And finally, ‘regulatory capture’ as regulators and supervisors are often captured - via revolving doors and other mechanisms - by the financial industry.
So the new rules will have to be incentive compatible, i.e. robust enough to overcome to these regulatory failures.
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How long will be before we can tell if the US and UK governments’ plans to rescue the banks prove effective or not? If they don’t when do you think lending will recover to near-normal levels? Canh Humphries, Beckenham
NR: There are three basic approaches to a clean-up of the banking system: recapitalization together with purchase by a bad bank of toxic assets; recapitalization together with guarantees – after a first loss – of the bad assets; outright government takeover (call it nationalization) of insolvent banks to be cleaned after takeover and then resold to the private sector.
Of the three options the first two have serious flaws: in the bad bank model the government may overpay for the bad assets as the true value of them is uncertain; even in the guarantee model there can be such implicit over-payment (or over-guarantee that is not properly priced).
In the bad bank model the government has the additional problem of having to manage all the bad assets it purchased.
Thus, paradoxically nationalization may be a more market friendly solution: it creates the biggest hit for common and preferred shareholders of clearly insolvent institutions and – possibly – even the unsecured creditors in case the bank insolvency is too large; it provides a fair upside to the tax-payer; it can resolve the problem of government managing the bad assets by reselling most of the assets and liabilities of the bank to new private shareholders after a clean-up of the bank.
This “nationalization” approach was the one successfully taken by Sweden while the current US and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and credit freeze.
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To balance the US economy - given the US structural current account deficit - the fiscal deficit needs to baloon. Can the US default on its debt? Alessandro Magnoli Bocchi, Kuwait
And, a related question also addressed in the next answer: What are the possible damaging, unintended consequences of the US stimulus plan? Alessandro Magnoli Bocchi, Kuwait
NR: While a large fiscal stimulus is necessary to avoid a greater fall of aggregate demand there are also reasons to be skeptical about the effectiveness of such a stimulus:
Most infrastructure spending is not ‘shovel-ready’ and its implementation may take too much time.
The tax stimulus may – like the 2008 rebate – be mostly saved or used to reduce credit card and mortgage debt, since, given the credit crunch, the ability of households to leverage the tax rebate to buy durable goods or homes is massively impaired.
Furthermore, the multipliers of fiscal policy are ambiguous and, more importantly, a tsunami of new public debt issuance may lead by the end of 2009 to a significant increase in long government bond rates as most countries in the world will now run budget deficits and thus the global supply of public savings will shrink.
With US fiscal deficits likely to be about $2 trillion in 2009 and $1.5 trillion in 2010; who, outside the US, as most of the financing of US fiscal deficits is done by non-residents, is going to buy such debt and at what dollar value of and level of interest rates?
Eventually, large and persistent fiscal deficits may even lead to a downgrade – in a few years – of the AAA rating of the US government.
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Do you think investigations and prosecutions should be conducted by the U.S. Government on the naked short selling of equities in the stock market? Should they be? Erich Benner, Blythewood, South Carolina
NR: The ban on naked short selling of equities was a mistake.
Short selling did not cause this crisis: it only reflected the concern about the solvency of many firms. And the ban on naked short selling only transferred the speculative pressure from equities to the credit defualt swaps market creating even greater problems in the credit derivative markets.
When equity markets were in a speculative frenzy of an asset bubble no one requested limits to the ability of investors to go long (even if such restrictions in the form of higher margins for leveraged purchases of stocks would have been beneficial).
And when during the same bullish bubble analyst after analyst showed up in the financial media and talked his book up, with no one objecting to this spin cycle. But when investors become bearish and start short selling stocks one hears talk about prosecuting the “evil short sellers”.
This is an outright silly view even if, in the downwards speculative frenzy, market prices can fall below fundamental valuations as cascading effects cause falling prices to lead to margin calls and greater forced selling.
But banning short selling is not the proper way to address this disruptive market dynamic.
Starting with the excesses of the boom period of a bubble is a more appropriate response, and one that would prevent such bubbles from becoming excessive, limiting the damage from the bursting of such massive bubbles.
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Has financial globalization come to an end? Jacques Ergas, Chile
NR: Financial globalization has not come to an end, but there is certainly a backlash against it.
To paraphrase Churchill - capitalist market economies open to trade and financial flows may be the worst economic regime, apart from the alternative, as non-market economy models have failed.
So while this crisis does not imply the end of market economy capitalism it has shown the failure of a particular model of capitalism: the laissez faire unregulated (or aggressively deregulated) wild-west model of free market capitalism with lack of prudential regulation and supervision of financial markets and with the lack of proper provision of public goods by governments.
It is the failures of ideas such as the “efficient market hypothesis” that deluded itself about the absence of market failures such as asset bubbles; the “rational expectations” paradigm that clashes with the insights of behavioral economics and finance; the “self-regulation of markets and institutions” that clashes with the classical agency problems in corporate governance that are thenselves exacerbated in financial companies by the greater degree of asymmetric information -how can a chief executive or a board monitor the risk-taking of thousands of separate profit-and-loss accounts? Then there are the distortions of compensation paid to bankers and traders.
This crisis also shows the failure of ideas such as the one that securitization reduces systemic risk rather than actually increase it; that risk can properly priced when the opacity and lack of transparency of financial firms and new instruments leads to unpriceable uncertainty rather than priceable risk.
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Will the crisis bring about a permanent, significant shift in the economic power balance of the world? Giles Chance, China
NR: The Anglo-Saxon economic and financial model is wounded and the role of the US as the leading global economic, financial and even geo-strategic superpower is reduced.
Even without this crisis, the relative and absolute power of the US would have been reduced by the rise of the fast growing economies of Brazil, Russia India and China and by the emergence of the European Union.
But the policy mistakes of the US that perpetuated twin fiscal and current account deficits and triggered the worst financial and economic crisis since the Great Depression has accelerated this shift in the economic and financial power balance of the world.
Economic and financial superpowers or empires tend to be net creditors and net lenders (running current account surpluses) such as the British Empire at its peak. But such empires decline - the British pounds role as the world’s leading reserve currency was lost during World War II when the UK became a large net debtor and net foreign borrower (running current account deficits) and had large domestic fiscal deficits.
The US is now the largest net borrower in the world (running huge current account deficits) and the largest net debtor in the world while its domestic fiscal deficits are surging too.
And unlike the 1980s when the US twin deficits were financed by the its friends and allies (Japan, Germany and the rest of the EU) this time around the largest lenders and creditors of the US are either its strategic rivals (Russia, China, etc.) or a bunch or relatively unstable petro-states.
So this balance of financial terror makes the US vulnerable to the kindness of strangers. This growing weakness of the US suggests a paradigm shift in the economic and financial – and eventually even geostrategic - power balance of the world.
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Do you believe in the projections made by the Chinese officials predicting a return to steady growth when all the planned stimulus measures have been implemented? Do you expect a reversal in the decisions taken the last 5 years to outsource a majority of the developed economies production to China? Fiorini Mauro, Belgium
NR: China is now experiencing a hard landing and I predict that Chinese growth in 2009 may not be higher than 5 per cent.
For a country that needs a growth rate of about 10 per cent to move millions of poor rural farmers to the modern urban industrial sector, a growth rate of 5 per cent would effectively be a hard landing.
Fourth quarter gross domestic product growth in China – measured on a quarter to quarter annualized basis – was closer to 0 per cent than to the 6.8 per cent year-over-year growth reported by the Chinese government.
Other factors also suggest a hard landing: There was a sharp fall in generation of electricity in the fourth quarter. China’s purchasing manager’s index was well below 50 and closer to 40 for six months in a row; there has been a sharp fall in imports, mostly of intermediate inputs and raw materials. And while some of the latest data show a marginal improvement in the second derivative of growth in January, the first derivative still shows contraction. The manufacturing sector is still 40 per cent of GDP and it is clearly shrinking.
Whether the short-run policy stimulus in China will be effective or not is not clear.
Instead, consumption levels are still depressed and private savings too high because of structural reasons that will take time to change. The out-sourcing of production to China and other emerging markets was not a mistake. But a model of growth based on cheap exports given an undervalued currency is now in crisis as the US downward adjustment of consumption requires an increase of domestic private and public demand in the surplus countries.
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I have read your grave warning about deflation. But, nevertheless, won’t the enormous increases in money supply (out of thin air largely) eventually give rise to serious inflation, possibly hyperinflation? George Todd, Benalmadena, Spain
NR: In the short run the greatest risks to the global economy are coming from deflationary pressures: slack in goods markets as aggregate demand falls relative to aggregate supply; slack in labor markets as unemployment rises sharply; slack in commodity markets as commodity prices tumble.
Concerns have been expressed that the massive injections of liquidity will be eventually inflationary.
But with large output gaps and surging unemployment rates, inflationary pressures are unlikely until such gaps are shrinking sharply.
Also, the injections of liquidity are satisfying a surging demand for liquidity so that the absence of such a large supply of money would lead to spikes in money market rates; while base money is sharply rising other measures of money and credit are flat or shrinking as the money multiplier falls. This signals that the extra liquidity is being hoarded rather than spent or lent out.
It is true that eventually there may be a temptation to use permanent – inflationary - monetization of large fiscal deficits to reduce the real value of public and private debts; indeed the inflation tax may become politically the path of least resistance if government would find it hard and unpopular to raise actual taxes.
But even a relatively dovish central bank such as the Federal Reserve under Ben Bernanke cannot afford to let the inflation genie out of the bottle – if inflation expectations were to rise from low single digits to high single digits or even double digits – because such a surge in inflation would - eventually – cause the need for a harsh Volcker-style recessionary disinflationary policy to bring the inflation- expectations-genie back behind glass.
Also, unexpected inflation can reduce the real value of nominal debts at fixed interest rates. But many liabilities are at variable rates: mortgages, bank deposits, short term debts of households, banks, governments, corporations. So a surge in inflation cannot reduce the real value of such debts as the interest rate on them would rapidly be re-priced to include any increase in expected inflation. So the inflation tax may not even be effective in reducing the liabilities of the private and public sector unless it becomes extremely and dangerously large.
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You recently mentioned total credit losses of $3.6 trillion compared to current losses of $1.6 trillion. Will the institutional and geographic distribution of the $2 trillion increase match that of the first $1.6 trillion, or will it be new regions and new institutions, that will get sucked in? Paul Broder
NR: Our RGE Monitor estimates of $3.6 trillion of peak credit losses refer only to loans and securities that were originally generated by US financial institutions. Of these $3.6 trillion $1.8 trillion will be borne by US banks and broker dealers while the rest by other capital market firms and investors. Since the losses coming from securities are estimated to be $2 trillion and about 40 per cent of them (based on IMF and Federal Reserve estimates) are borne by non-US investors we already have $800 billion of losses that will hit foreign investors/financial institutions, mostly in Europe.
But we have not done yet a systematical analysis of the losses that will hit Eurozone and UK banks or banks in other regions of the world. Losses to these institutions include the $800 billion from US securitized products sold abroad as well as the other losses deriving from loan origination and securitization and issuance of other instruments in areas such as Europe and other parts of the world.
A preliminary analysis suggest that, in the aggregate, the US banking system is insolvent as its capital before the crisis was $1.4 trillion and below expected losses of $1.8 trillion; a good part of the UK banking system appears also to be insolvent.
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Is the solution to just keep re-inflating bubble after bubble to recapitalize our consumer driven economy or is it time for a huge systemic paradigm shift away from consumerism? What type of shift would you envision and would it destroy the economy as we currently know it? Robert Singer, Oregon, USA
NR: For the last 30 years the US has been growing fast only during periods of asset bubbles that eventually burst with significant economic and financial costs.
The 1980s real estate bubble went bust in the late part of that decade leading to a severe banking crisis for the Savings and Loan banks, a credit crunch and a severe recession in 1990-91; next the 1990s tech/internet bubble went bust in 2000 leading to the 2001 recession; massive monetary and credit easing – as well as lax supervision/regulation of mortgages and credit – led to another housing and credit bubble that has now gone bust creating a severe financial crisis and recession.
The current monetary easing may lead to another bubble but we are somehow running out of bubbles to create.
Housing, credit, equities, commodities, hedge funds, private equity bubbles: they have all gone bust now. We need to create an economic system that is less prone to bubbles and more likely to lead to sustainable stable growth.
For the last few years the US has overinvested in the most unproductive form of capital – residential housing stock that increase utility but not labor productivity – and not enough into physical capital that increases the productivity of labor.
Also we overinvested in the financial sector, a corollary of the housing boom: when the S&P500 market capitalization of financial firms was 25 per cent of the market and when over a third of the profits or earnings of S&P500 constituents came from financial companies, that was an excess of finance.
And having a country where there are more financial engineers than computer engineers or mechanical engineers means a misallocation of human capital as well.
So we need to create a growth model relying less on housing/real estate, less on finance and less on having the brightest minds of the country going into financial services rather than into the production and innovation of new and improved goods and services.
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Could any of the weak eurozone countries should be forced out of the single currency because of the effects of the crisis, and if that happened, how is the euro likely to behave? Vincenzo, Italy
NR: There is now a rising – even if still quite low – risk that some countries will eventually be forced out of the eurozone.
The whole idea of a monetary union was that since member countries would not have independent monetary policy, independent fiscal policy and independent exchange rate policy they would be induced to implement more aggressively structural reforms to ensure convergence of productivity growth and prevent divergence of economic performance.
Germany went through a brutal corporate restructuring that led to rising labor productivity growth with modest nominal wage growth that restored the competitiveness of the country.
In Spain, Portugal, Italy and Greece instead such structural reforms lagged and nominal wage growth outstripped productivity growth leading to increases in relative unit labor cost and real appreciation that reduced competitiveness. And now, on top of this loss of competitiveness some eurozone economies suffer also of a too-big-to-be-saved problem as the potential losses of their banks are larger than the national fiscal resources.
And now, on top of this loss of competitiveness some eurozone economies suffer also of a too-big-to-be-saved problem, as the potential losses of their banks are larger than the national fiscal resources.
So the monetary union is under pressure as sovereign spreads are also rising. Two years ago – while still being in the opposition – the current Italian prime minister, Silvio Berlusconi and Mr Tremonti, his exonomic minister, argued that the euro had been a disaster for Italy.
With friends like these who needs enemies in the monetary union?
While the risk of a break-up of the eurozone is still distant this financial and economic crisis is the first real test of the monetary union.
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Many analysts are now predicting that the bond market is the last and most serious bubble which will burst shortly. Do you agree? Mike, Qatar
NR: The current fall in government bond yields is justified by economic fundamentals: a severe recession, risks of deflation, risk aversion and move away from risk assets such as equities.
But certainly, over time, large and unsustainable budget deficits in many emerging and advanced economies, may lead to a rise in sovereign risk and a risk in government bond yields. Also the risk – small but rising – that excessive permanent monetization of such deficits will lead to much higher inflation suggests the existence of a minor bubble in government bond yields.
And indeed, in the last two weeks, the back-up in yield on US inflation-linked bonds and traditional 10 to 30 year bonds suggest the concerns of market participants about the sustainability of large fiscal deficits that – over the long run – may lead to solvency concerns.
Roubini: Anglo-Saxon model has failed
The Anglo-Saxon model of supervision and regulation of the financial system has failed, Nouriel Roubini, chairman of RGE Monitor and professor of economics at New York University, told the Financial Times on Monday.
Answering questions from FT.com readers, Prof Roubini, who is widely credited with having predicted the current financial crisis, said the supervisory system “relied on self-regulation that, in effect, meant no regulation; on market discipline that does not exist when there is euphoria and irrational exuberance; on internal risk management models that fail because – as a former chief executive of Citi put it – when the music is playing you gotta stand up and dance.”
“All the pillars of Basel II have already failed even before being implemented,” he added, referring to the internationally agreed set of banking regulations that are forcing banks to set aside more capital to maintain their existing lending.
Prof Roubini also predicted that it was possible another large bank could fail, saying: “In many countries the banks may be too big to fail but also too big to save, as the fiscal/financial resources of the sovereign may not be large enough to rescue such large insolvencies in the financial system”.
He also criticised the US and UK approach to bank bail-outs, comparing it with attempts by Japan in the 1990s to solve its banking crisis. “The current US and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and credit freeze,” he said.
Economists and politicians hope to identify tentative signs of recovery in leading economies during the second half of 2009, as stimulus measures from governments and action on interest rates by central banks begin to kick in.
But recent data suggest it may take a little longer. Meanwhile, the World Economic Forum’s latest report warns of the risks of a fiscal crisis, created by the very government spending intended to rescue economies from the turmoil in the global financial system.
So, is the worst nearly over? Or is there still a way to go? Recently returned from Davos, Nouriel Roubini, chairman of RGE Monitor and professor of Economics at New York University, will answer readers’ questions on the outlook for the global economy and its impact on markets from 1400 GMT on Monday February 9.
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It is pretty much consensus now that 2009 will be a zero growth year for the world economy (something that you forecast well in advance). It seems that the major risk for the following years is having a lost decade of Japanese-style stagnation but on a worldwide basis. How are the governments in US and Europe faring so far in their effort to avoid that? Marco, Sao PauloNouriel
Roubini: To avoid a Japanese style multi-year L-shaped near-depression or stag-deflation (a deadly combination of stagnation, recession and deflation) the appropriate, coherent and credible combination of monetary easing (traditional and unorthodox), fiscal stimulus, proper clean-up of the financial system and reduction of the debt burden of insolvent private agents (households and non-financial companies) is necessary.The eurozone is well behind the US in its efforts as: a) the ECB is behind the curve in cutting policy rates and creating non-traditional facilities to deal with the liquidity and credit crunch; b) the fiscal stimulus is too modest as those who can afford it (Germany) are lukewarm about it and those who need it the most (Spain, Portugal, Greece, Italy) can least afford it as they already have large budget deficits; c) there is lack of cross-border burden sharing of the fiscal costs of bailing out financial institutions.The U.S. has done more (with its aggressive monetary easing and large fiscal stimulus putting it ahead) but two key elements are key to avoid a near-depression and still missing: a proper clean-up of the banking system that may require a proper triage between solvent and insolvent banks and the nationalization of many banks; and a more aggressive and across-the-board solution to the unsustainable debt burden of millions of insolvent households.Thus, I would say the L-shaped near-depression scenario is possible.
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How can Davos, a gathering of the greediest, most avaricious and incompetent people of the planet, ever fix any of the problems they have created in the first place, and hugely benefited from?. Do you agree that when the boom was at its height, you were mistreated there when you tried to draw attention on the looming crisis? Are you now afraid of being now co-opted by the system and losing your independence? Marcel Knecht, Villa Santiago, Mexico
NR: It is important to keep one’s intellectual rigor and honesty free from any financial conflict of interest (I never trade in markets and so I am never “talk my book” when I present my views).
I have kept my balanced and analytically rigorous but bearish view over time and adjusted my outlook only at the margin in light of the evolving circumstances.
But the basic thrust of my analysis and views about the severity of this financial and economic crisis – the worst since the Great Depression - has not changed.
I don’t think anyone could suggest that I have been co-opted by the system and lost my independence. If anything my concerns that a severe U-shaped global recession may turn into a worse, L-shaped near-depression have somewhat increased over time.
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It seems clear that governments will not allow their banking system to fail altogether and that they will intervene to rescue whenever needed. My question is: The governments will save the banks, but who will save the governments? Is it possible that we are about to see countries default? What does that mean for the global economy? Which countries are the ones who pose the greatest risk? Jonathan Arad
NR: In many countries the banks may be too-big-to-fail but also too- big-to-save, as the fiscal/financial resources of the sovereign may not be large enough to rescue such large insolvencies in the financial system.
Traditionally only emerging markets suffered – and still suffer - from such a problem. But now such sovereign risk – as measured by the sovereign spread - is also rising in many European economies whose banks may be larger than the ability of the sovereign to rescue them: Iceland, Greece, Spain, Italy, Belgium, Switzerland and, some suggest, even the UK.
The process of socializing the private losses from this crisis has already moved many of the liabilities of the private sector onto the books of the sovereign: banks, other financial institutions and, soon enough possibly, households and some important non-financial corporate companies.
At some point a sovereign bank may crack, in which case the ability of governments to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued.
---------------------------------------------------------------------------------------------------------------------
What level of oversight is now appropriate from the financial regulatory authorities? Do they need very large new measures or should they have a light touch? Ashok Soni
NR: It is clear that the Anglo-Saxon model of supervision and regulation of the financial system has failed.
It relied on self-regulation that, in effect, meant no regulation; on market discipline that does not exist when there is euphoria and irrational exuberance; on internal risk management models that fail because – as a former chief executive of Citi put it – when the music is playing you gotta stand up and dance.
Furthermore, the self-regulation approach created rating agencies that had massive conflicts of interest and a supervisory system dependent on principles rather than rules. This light-touch regulation in effect became regulation of the softest-touch.
Thus, all the pillars of Basel II have already failed even before being implemented.
Since the pendulum had swung too much in the direction of self-regulation and the principles-based approach, we now need more binding rules on liquidity, capital, leverage, transparency, compensation and so on...
But the design of the new system should be robust enough to counter three types of problems with rules:
A tendancy toward ‘regulatory arbitrage’ should be bourne in mind, as bankers can find creative ways to bypass rules faster than regulators can improve them.
Then there is ‘jurisdictional arbitrage’ as financial activity may move to more lax jurisdictions.
And finally, ‘regulatory capture’ as regulators and supervisors are often captured - via revolving doors and other mechanisms - by the financial industry.
So the new rules will have to be incentive compatible, i.e. robust enough to overcome to these regulatory failures.
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How long will be before we can tell if the US and UK governments’ plans to rescue the banks prove effective or not? If they don’t when do you think lending will recover to near-normal levels? Canh Humphries, Beckenham
NR: There are three basic approaches to a clean-up of the banking system: recapitalization together with purchase by a bad bank of toxic assets; recapitalization together with guarantees – after a first loss – of the bad assets; outright government takeover (call it nationalization) of insolvent banks to be cleaned after takeover and then resold to the private sector.
Of the three options the first two have serious flaws: in the bad bank model the government may overpay for the bad assets as the true value of them is uncertain; even in the guarantee model there can be such implicit over-payment (or over-guarantee that is not properly priced).
In the bad bank model the government has the additional problem of having to manage all the bad assets it purchased.
Thus, paradoxically nationalization may be a more market friendly solution: it creates the biggest hit for common and preferred shareholders of clearly insolvent institutions and – possibly – even the unsecured creditors in case the bank insolvency is too large; it provides a fair upside to the tax-payer; it can resolve the problem of government managing the bad assets by reselling most of the assets and liabilities of the bank to new private shareholders after a clean-up of the bank.
This “nationalization” approach was the one successfully taken by Sweden while the current US and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and credit freeze.
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To balance the US economy - given the US structural current account deficit - the fiscal deficit needs to baloon. Can the US default on its debt? Alessandro Magnoli Bocchi, Kuwait
And, a related question also addressed in the next answer: What are the possible damaging, unintended consequences of the US stimulus plan? Alessandro Magnoli Bocchi, Kuwait
NR: While a large fiscal stimulus is necessary to avoid a greater fall of aggregate demand there are also reasons to be skeptical about the effectiveness of such a stimulus:
Most infrastructure spending is not ‘shovel-ready’ and its implementation may take too much time.
The tax stimulus may – like the 2008 rebate – be mostly saved or used to reduce credit card and mortgage debt, since, given the credit crunch, the ability of households to leverage the tax rebate to buy durable goods or homes is massively impaired.
Furthermore, the multipliers of fiscal policy are ambiguous and, more importantly, a tsunami of new public debt issuance may lead by the end of 2009 to a significant increase in long government bond rates as most countries in the world will now run budget deficits and thus the global supply of public savings will shrink.
With US fiscal deficits likely to be about $2 trillion in 2009 and $1.5 trillion in 2010; who, outside the US, as most of the financing of US fiscal deficits is done by non-residents, is going to buy such debt and at what dollar value of and level of interest rates?
Eventually, large and persistent fiscal deficits may even lead to a downgrade – in a few years – of the AAA rating of the US government.
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Do you think investigations and prosecutions should be conducted by the U.S. Government on the naked short selling of equities in the stock market? Should they be? Erich Benner, Blythewood, South Carolina
NR: The ban on naked short selling of equities was a mistake.
Short selling did not cause this crisis: it only reflected the concern about the solvency of many firms. And the ban on naked short selling only transferred the speculative pressure from equities to the credit defualt swaps market creating even greater problems in the credit derivative markets.
When equity markets were in a speculative frenzy of an asset bubble no one requested limits to the ability of investors to go long (even if such restrictions in the form of higher margins for leveraged purchases of stocks would have been beneficial).
And when during the same bullish bubble analyst after analyst showed up in the financial media and talked his book up, with no one objecting to this spin cycle. But when investors become bearish and start short selling stocks one hears talk about prosecuting the “evil short sellers”.
This is an outright silly view even if, in the downwards speculative frenzy, market prices can fall below fundamental valuations as cascading effects cause falling prices to lead to margin calls and greater forced selling.
But banning short selling is not the proper way to address this disruptive market dynamic.
Starting with the excesses of the boom period of a bubble is a more appropriate response, and one that would prevent such bubbles from becoming excessive, limiting the damage from the bursting of such massive bubbles.
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Has financial globalization come to an end? Jacques Ergas, Chile
NR: Financial globalization has not come to an end, but there is certainly a backlash against it.
To paraphrase Churchill - capitalist market economies open to trade and financial flows may be the worst economic regime, apart from the alternative, as non-market economy models have failed.
So while this crisis does not imply the end of market economy capitalism it has shown the failure of a particular model of capitalism: the laissez faire unregulated (or aggressively deregulated) wild-west model of free market capitalism with lack of prudential regulation and supervision of financial markets and with the lack of proper provision of public goods by governments.
It is the failures of ideas such as the “efficient market hypothesis” that deluded itself about the absence of market failures such as asset bubbles; the “rational expectations” paradigm that clashes with the insights of behavioral economics and finance; the “self-regulation of markets and institutions” that clashes with the classical agency problems in corporate governance that are thenselves exacerbated in financial companies by the greater degree of asymmetric information -how can a chief executive or a board monitor the risk-taking of thousands of separate profit-and-loss accounts? Then there are the distortions of compensation paid to bankers and traders.
This crisis also shows the failure of ideas such as the one that securitization reduces systemic risk rather than actually increase it; that risk can properly priced when the opacity and lack of transparency of financial firms and new instruments leads to unpriceable uncertainty rather than priceable risk.
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Will the crisis bring about a permanent, significant shift in the economic power balance of the world? Giles Chance, China
NR: The Anglo-Saxon economic and financial model is wounded and the role of the US as the leading global economic, financial and even geo-strategic superpower is reduced.
Even without this crisis, the relative and absolute power of the US would have been reduced by the rise of the fast growing economies of Brazil, Russia India and China and by the emergence of the European Union.
But the policy mistakes of the US that perpetuated twin fiscal and current account deficits and triggered the worst financial and economic crisis since the Great Depression has accelerated this shift in the economic and financial power balance of the world.
Economic and financial superpowers or empires tend to be net creditors and net lenders (running current account surpluses) such as the British Empire at its peak. But such empires decline - the British pounds role as the world’s leading reserve currency was lost during World War II when the UK became a large net debtor and net foreign borrower (running current account deficits) and had large domestic fiscal deficits.
The US is now the largest net borrower in the world (running huge current account deficits) and the largest net debtor in the world while its domestic fiscal deficits are surging too.
And unlike the 1980s when the US twin deficits were financed by the its friends and allies (Japan, Germany and the rest of the EU) this time around the largest lenders and creditors of the US are either its strategic rivals (Russia, China, etc.) or a bunch or relatively unstable petro-states.
So this balance of financial terror makes the US vulnerable to the kindness of strangers. This growing weakness of the US suggests a paradigm shift in the economic and financial – and eventually even geostrategic - power balance of the world.
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Do you believe in the projections made by the Chinese officials predicting a return to steady growth when all the planned stimulus measures have been implemented? Do you expect a reversal in the decisions taken the last 5 years to outsource a majority of the developed economies production to China? Fiorini Mauro, Belgium
NR: China is now experiencing a hard landing and I predict that Chinese growth in 2009 may not be higher than 5 per cent.
For a country that needs a growth rate of about 10 per cent to move millions of poor rural farmers to the modern urban industrial sector, a growth rate of 5 per cent would effectively be a hard landing.
Fourth quarter gross domestic product growth in China – measured on a quarter to quarter annualized basis – was closer to 0 per cent than to the 6.8 per cent year-over-year growth reported by the Chinese government.
Other factors also suggest a hard landing: There was a sharp fall in generation of electricity in the fourth quarter. China’s purchasing manager’s index was well below 50 and closer to 40 for six months in a row; there has been a sharp fall in imports, mostly of intermediate inputs and raw materials. And while some of the latest data show a marginal improvement in the second derivative of growth in January, the first derivative still shows contraction. The manufacturing sector is still 40 per cent of GDP and it is clearly shrinking.
Whether the short-run policy stimulus in China will be effective or not is not clear.
Instead, consumption levels are still depressed and private savings too high because of structural reasons that will take time to change. The out-sourcing of production to China and other emerging markets was not a mistake. But a model of growth based on cheap exports given an undervalued currency is now in crisis as the US downward adjustment of consumption requires an increase of domestic private and public demand in the surplus countries.
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I have read your grave warning about deflation. But, nevertheless, won’t the enormous increases in money supply (out of thin air largely) eventually give rise to serious inflation, possibly hyperinflation? George Todd, Benalmadena, Spain
NR: In the short run the greatest risks to the global economy are coming from deflationary pressures: slack in goods markets as aggregate demand falls relative to aggregate supply; slack in labor markets as unemployment rises sharply; slack in commodity markets as commodity prices tumble.
Concerns have been expressed that the massive injections of liquidity will be eventually inflationary.
But with large output gaps and surging unemployment rates, inflationary pressures are unlikely until such gaps are shrinking sharply.
Also, the injections of liquidity are satisfying a surging demand for liquidity so that the absence of such a large supply of money would lead to spikes in money market rates; while base money is sharply rising other measures of money and credit are flat or shrinking as the money multiplier falls. This signals that the extra liquidity is being hoarded rather than spent or lent out.
It is true that eventually there may be a temptation to use permanent – inflationary - monetization of large fiscal deficits to reduce the real value of public and private debts; indeed the inflation tax may become politically the path of least resistance if government would find it hard and unpopular to raise actual taxes.
But even a relatively dovish central bank such as the Federal Reserve under Ben Bernanke cannot afford to let the inflation genie out of the bottle – if inflation expectations were to rise from low single digits to high single digits or even double digits – because such a surge in inflation would - eventually – cause the need for a harsh Volcker-style recessionary disinflationary policy to bring the inflation- expectations-genie back behind glass.
Also, unexpected inflation can reduce the real value of nominal debts at fixed interest rates. But many liabilities are at variable rates: mortgages, bank deposits, short term debts of households, banks, governments, corporations. So a surge in inflation cannot reduce the real value of such debts as the interest rate on them would rapidly be re-priced to include any increase in expected inflation. So the inflation tax may not even be effective in reducing the liabilities of the private and public sector unless it becomes extremely and dangerously large.
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You recently mentioned total credit losses of $3.6 trillion compared to current losses of $1.6 trillion. Will the institutional and geographic distribution of the $2 trillion increase match that of the first $1.6 trillion, or will it be new regions and new institutions, that will get sucked in? Paul Broder
NR: Our RGE Monitor estimates of $3.6 trillion of peak credit losses refer only to loans and securities that were originally generated by US financial institutions. Of these $3.6 trillion $1.8 trillion will be borne by US banks and broker dealers while the rest by other capital market firms and investors. Since the losses coming from securities are estimated to be $2 trillion and about 40 per cent of them (based on IMF and Federal Reserve estimates) are borne by non-US investors we already have $800 billion of losses that will hit foreign investors/financial institutions, mostly in Europe.
But we have not done yet a systematical analysis of the losses that will hit Eurozone and UK banks or banks in other regions of the world. Losses to these institutions include the $800 billion from US securitized products sold abroad as well as the other losses deriving from loan origination and securitization and issuance of other instruments in areas such as Europe and other parts of the world.
A preliminary analysis suggest that, in the aggregate, the US banking system is insolvent as its capital before the crisis was $1.4 trillion and below expected losses of $1.8 trillion; a good part of the UK banking system appears also to be insolvent.
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Is the solution to just keep re-inflating bubble after bubble to recapitalize our consumer driven economy or is it time for a huge systemic paradigm shift away from consumerism? What type of shift would you envision and would it destroy the economy as we currently know it? Robert Singer, Oregon, USA
NR: For the last 30 years the US has been growing fast only during periods of asset bubbles that eventually burst with significant economic and financial costs.
The 1980s real estate bubble went bust in the late part of that decade leading to a severe banking crisis for the Savings and Loan banks, a credit crunch and a severe recession in 1990-91; next the 1990s tech/internet bubble went bust in 2000 leading to the 2001 recession; massive monetary and credit easing – as well as lax supervision/regulation of mortgages and credit – led to another housing and credit bubble that has now gone bust creating a severe financial crisis and recession.
The current monetary easing may lead to another bubble but we are somehow running out of bubbles to create.
Housing, credit, equities, commodities, hedge funds, private equity bubbles: they have all gone bust now. We need to create an economic system that is less prone to bubbles and more likely to lead to sustainable stable growth.
For the last few years the US has overinvested in the most unproductive form of capital – residential housing stock that increase utility but not labor productivity – and not enough into physical capital that increases the productivity of labor.
Also we overinvested in the financial sector, a corollary of the housing boom: when the S&P500 market capitalization of financial firms was 25 per cent of the market and when over a third of the profits or earnings of S&P500 constituents came from financial companies, that was an excess of finance.
And having a country where there are more financial engineers than computer engineers or mechanical engineers means a misallocation of human capital as well.
So we need to create a growth model relying less on housing/real estate, less on finance and less on having the brightest minds of the country going into financial services rather than into the production and innovation of new and improved goods and services.
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Could any of the weak eurozone countries should be forced out of the single currency because of the effects of the crisis, and if that happened, how is the euro likely to behave? Vincenzo, Italy
NR: There is now a rising – even if still quite low – risk that some countries will eventually be forced out of the eurozone.
The whole idea of a monetary union was that since member countries would not have independent monetary policy, independent fiscal policy and independent exchange rate policy they would be induced to implement more aggressively structural reforms to ensure convergence of productivity growth and prevent divergence of economic performance.
Germany went through a brutal corporate restructuring that led to rising labor productivity growth with modest nominal wage growth that restored the competitiveness of the country.
In Spain, Portugal, Italy and Greece instead such structural reforms lagged and nominal wage growth outstripped productivity growth leading to increases in relative unit labor cost and real appreciation that reduced competitiveness. And now, on top of this loss of competitiveness some eurozone economies suffer also of a too-big-to-be-saved problem as the potential losses of their banks are larger than the national fiscal resources.
And now, on top of this loss of competitiveness some eurozone economies suffer also of a too-big-to-be-saved problem, as the potential losses of their banks are larger than the national fiscal resources.
So the monetary union is under pressure as sovereign spreads are also rising. Two years ago – while still being in the opposition – the current Italian prime minister, Silvio Berlusconi and Mr Tremonti, his exonomic minister, argued that the euro had been a disaster for Italy.
With friends like these who needs enemies in the monetary union?
While the risk of a break-up of the eurozone is still distant this financial and economic crisis is the first real test of the monetary union.
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Many analysts are now predicting that the bond market is the last and most serious bubble which will burst shortly. Do you agree? Mike, Qatar
NR: The current fall in government bond yields is justified by economic fundamentals: a severe recession, risks of deflation, risk aversion and move away from risk assets such as equities.
But certainly, over time, large and unsustainable budget deficits in many emerging and advanced economies, may lead to a rise in sovereign risk and a risk in government bond yields. Also the risk – small but rising – that excessive permanent monetization of such deficits will lead to much higher inflation suggests the existence of a minor bubble in government bond yields.
And indeed, in the last two weeks, the back-up in yield on US inflation-linked bonds and traditional 10 to 30 year bonds suggest the concerns of market participants about the sustainability of large fiscal deficits that – over the long run – may lead to solvency concerns.
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