Roubini: Moving From the Post-Bubble, Post-Bust Economy to Growth

Below are highlights from a recent paper by Daniel Alpert, Robert Hockett, and Nouriel Roubini on how to get the global economy out of this mess. I think it is something policy makers should take seriously. Bill Gross of PIMCO recently tweeted he agrees with much of it.

Here are the important extracts in terms of the causes of the crisis. I have also embedded the full pdf version, which has suggested policy prescriptions as well.

  • It is not only the U.S. economy that is in peril right now. …Europe is struggling to prevent the sovereign debt problems of its peripheral Euro-zone economies from spiraling into a full-fledged banking crisis… Meanwhile, China and other large emerging economies… are beginning to experience slowdowns…
  • Nor is renewed recession the only threat we now face.  Even if a return to negative growth rates is somehow avoided, there will remain a real and present danger that Europe and the United States alike fall into an indefinitely lengthy period of negligible growth, high unemployment and deflation, much as Japan has experienced over the past 20 years following its own stock-and-real estate bubble and burst of the early 1990s.
  • Our economic straits are rendered all the more dire, and the just mentioned scenario accordingly all the more likely, by political dysfunction and attendant paralysis in both the United States and Europe… For despite the standoff over raising the U.S. debt ceiling this past August, the principal problem in the United States has not been government inaction. It has been inadequate action, proceeding on inadequate understanding of what ails us.
  • The questions now urgently before us, then, are these: First, why have the policies attempted thus far fallen so far short? And second, what should we be doing instead?
  • First, the present slump is a balance-sheet Lesser Depression or Great Recession of nearly unprecedented magnitude, occasioned by our worst credit-fueled asset price bubble and burst since the late 1920s.4 Hence, like the crisis that unfolded throughout the 1930s, the one we are now living through wreaks all the destruction typically wrought by a Fisher-style debt-deflation.
  • Our present crisis is more formidable even than would be a debt-deflation alone… For the second key characteristic of our present plight is that it is the culmination of troubling trends that have been in the making for more than two decades… The first of those developments has been the steady entry into the world economy of successive waves of new export-oriented economies, beginning with Japan and the Asian tigers in the 1980s and peaking with China in the early 2000s, with more than two billion newly employable workers. The integration of these high-savings, lower wage economies into the global economy, occurring as it did against the backdrop of dramatic productivity gains rooted in new information technologies and the globalization of corporate supply chains, decisively shifted the balance of global supply and demand. In consequence, the world economy now is beset by excess supplies of labor, capital, and productive capacity relative to global demand.
  • The second long term development that renders the current debt-deflation, already worse than a mere cyclical downturn, worse even than other debt-deflations is this: The same integration of new rising economies with ever more competitive workforces into the world economy also further shifted the balance of power between labor and capital in the developed world. That has resulted not only in stagnant wages in the United States, but also in levels of income and wealth inequality not seen since the immediate pre-Great-Depression1920s.

  1. fresno dan says

    “…proceeding on inadequate understanding of what ails us.”
    Perhaps. I doubt Bernanke and Geithner are in simple terms corrupt. But they have a simple belief that credit is the “lifeblood of the economy” and everything flows from that.
    I would say PRODUCTIVE and realistically priced investment is what moves an economy forward. Banks ostensible purpose is to loan (or perhaps more accurately create) money to invest in productive enterprize. Financial institutions failed to price and assess risk; or to practice their fiduciary duty to understand (the only question is: were they REALLY that stupid, or were they so familiar with government policy that they KNEW TBTF was government policy??? I would say they knew, and got themselves plenty of bonuses and stock options) – demonstratably, emprically, in reality.
    Our solution is equivalent to saying that the Titannic didn’t hit the iceberg hard enough – so lets build a bigger, faster Titannic and really ram that berg. We can’t live without big boats, but good grief – make sure they have enough lifeboats!

  2. David Lazarus says

    Better still make sure that the boats are small enough that you have lots, so the loss of one is not likely to get all the others nervous. Breaking up the big banks would be a start, though we should also refuse to backstop any bank that trades across borders as this creates risk arbitrage problems and disputes over whom bails out which bank. So while Barclays was not bailed out by the UK government it was bailed out to the tune of $6 billion by the AIG backstop.

  3. Bernard says

    it wasn’t Government inaction that got to this point. that is how we got to this point. . Government now seen as a tool to be used to support the Elites who run our Government through their agents via Congressmen and the Court system. they all do the Elites bidding.

    very much an active move by all involved, just not the way it used to be done.

    there was not any lack of Government action. this is the “new” way Government responds to the demands of the Elites.

    1. David Lazarus says

      The recent comments about over consumption by americans is a sign of that. This shoots that response down in flames.

      One thing that does need to be done is significant reform of political finance laws. First of all is a ban on all non voters making political contributions. Also a cap on donations from ALL sources of $5000. That would stop company donations from shareholders. Make it a criminal offence in which the entire board of directors have a mandatory three years no parole in jail. This should also end companies whose sole aim is to make political donations in secret. Since the median wage is less than $50000 a cap on all contributions of $5000 per person would be fair. This figure could be lower depending on median wage, with which it should be linked. So unless median wage increases political contributions are capped. Companies and Unions can make political contributions but they must get annual approval from each shareholder or union member who they want to support, this must be in writing. These contributions are also part of the $5000 cap. So if you make a private donation of $5000 you would be banned from making any additional contributions be they union political subs or via shareholders rights. Clean up political finance and you can start to clean up the economy.

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