Statement by Nouriel Roubini
We carry below a very important statement on the world economy by Nouriel Roubini distributed by him on 10 October 2008. The CWI has quoted extensively from Roubini at different stages in the development of the crisis. This is because he has been one of the most accurate and realistic, economists in assessing the present stage through which the world economy is passing and what is the likely outcome.
This statement cannot be faulted in its diagnosis of the maladies of and prospects for world capitalism. Roubini is correct when he says that the US and the advanced industrial countries are now "headed towards a near-term systemic financial meltdown… All the advanced economies representing 55% of global GDP… entered a recession even before the massive financial shocks." This "recession" is now combined with "a severe financial crisis and a severe banking crisis in advanced economies". Moreover, there is a "re-coupling of the emerging market economies" rather than the "decoupling" that capitalist economists promised.
Moreover, Roubini is correct that this is likely to be a severe crisis – no matter what ‘temporary’ measures governments take – "U-shaped recession" or even an "L-shaped recession… like the one experienced by Japan in the 1990s after the bursting of its real estate and equity bubble". Most crucially, he points out that "lack of confidence… is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown". In other words, this is not just an economic crisis but a severe political crisis, a crisis of leadership for capitalism.
Roubini scores a bull’s eye when he correctly writes: "At this point severe damage is done and one cannot rule out a systemic collapse and a global depression."
However, will his remedies, which are essentially Keynesian in character, be adopted by the world’s capitalist governments? Because they are in panic mode, many of them very well could be. The partial nationalisations in the US, Britain and Iceland have not worked. This has prompted a writer in the Financial Times on 10 October to demand "temporary full state ownership" of the banks and financial institutions. It is not impossible that Roubini’s proposal for "a temporary freeze on all foreclosures" – repossessions of houses – could be introduced. Even "massive direct government fiscal stimulus packages" are possible, such is the depth of the abyss that has opened up for world capitalism.
Moreover, there could be a serious attempt on the part of the G7 large capitalist powers, joined by Russia, China and others, for collaboration and the "recycling of the surpluses of creditors" in an attempt to avoid the whole of the world plunging into economic chaos and the social and political convulsions that would follow.
These proposals are an echo of Roosevelt’s ‘New Deal’ policies of the 1930s. The ruling class is now so desperate to avoid the consequences of this systemic collapse that they are prepared to throw overboard everything that they have stood for in the last 30 years. They will jump into any ‘lifeboat’, even if it is leaky and risks sinking some time in the future. However, Roosevelt’s measures were introduced in 1933-34 when the American economy was coming out of recession. Moreover, as we have pointed out previously, these measures did not end the depression, only ameliorating some of the effects for some sections of the population. Therefore, the most likely scenario, as we sketch above, is of a serious economic recession, at the very least, in which all of the gains of the working class will be threatened.
These events have already discredited not one model of capitalism, neo-liberalism, but the whole system. The ‘free market’ threatens to drag millions into the abyss of unemployment and misery. For socialism to come roaring back as the alternative for the working class needs a mass political alternative to the discredited capitalist parties including the ex-workers’ parties of social democracy. We urge all sections of the CWI and the wider labour movement to energetically campaign now for the ideas of an alternative socialist plan of production to the chaos of capitalism, while at the same time fighting shoulder to shoulder with working class people, for real democratic and socialist nationalisation in defence of all jobs and services and past gains of the working class.
October 9, 2008
Nouriel Roubini: The world is at severe risk of a global systemic financial meltdown and a severe global depression
The U.S. and advanced economies’ financial systems are now headed towards a near-term systemic financial meltdown as day after day stock markets are in free fall, money markets have shut down while their spreads are skyrocketing, and credit spreads are surging through the roof. There is now the beginning of a generalized run on the banking system of these economies; a collapse of the shadow banking system, i.e. those non-banks (broker dealers, non-bank mortgage lenders, SIV and conduits, hedge funds, money market funds, private equity firms) that, like banks, borrow short and liquid, are highly leveraged and lend and invest long and illiquid, and are thus at risk of a run on their short-term liabilities; and now a roll-off of the short term liabilities of the corporate sectors that may lead to widespread bankruptcies of solvent but illiquid financial and non-financial firms.
On the real economic side, all the advanced economies representing 55% of global GDP (U.S.A, Eurozone, UK, other smaller European countries, Canada, Japan, Australia, New Zealand, Japan) entered a recession even before the massive financial shocks that started in the late summer made the liquidity and credit crunch even more virulent and will thus cause an even more severe recession than the one that started in the spring. So we have a severe recession, a severe financial crisis and a severe banking crisis in advanced economies.
There was no decoupling among advanced economies and there is no decoupling but rather re-coupling of the emerging market economies with the severe crisis of the advanced economies. By the third quarter of this year global economic growth will be in negative territory signaling a global recession. The re-coupling of emerging markets was initially limited to stock markets that fell even more than those of advanced economies as foreign investors pulled out of these markets; but then it spread to credit markets and money markets and currency markets bringing to the surface the vulnerabilities of many financial systems and corporate sectors that had experienced credit booms and that had borrowed short and in foreign currencies. Countries with large current account deficits and/or large fiscal deficits and with large short-term foreign currency liabilities and borrowings have been the most fragile. But even the better performing ones – like the BRICs club of Brazil, Russia, India and China – are now at risk of a hard landing. Trade and financial and currency and confidence channels are now leading to a massive slowdown of growth in emerging markets with many of them now at risk not only of a recession but also of a severe financial crisis.
The crisis was caused by the largest leveraged asset bubble and credit bubble in the history of humanity where excessive leveraging and bubbles were not limited to housing in the U.S. but also to housing in many other countries and excessive borrowing by financial institutions and some segments of the corporate sector and of the public sector in many and different economies: an housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression.
At this point the recession train has left the station; the financial and banking crisis train has left the station. The delusion that the U.S. and advanced economies contraction would be short and shallow – a V-shaped six month recession – has been replaced by the certainty that this will be a long and protracted U-shaped recession that may last at least two years in the U.S. and close to two years in most of the rest of the world. And given the rising risk of a global systemic financial meltdown, the probability that the outcome could become a decade long L-shaped recession – like the one experienced by Japan after the bursting of its real estate and equity bubble – cannot be ruled out.
And in a world where there is a glut and excess capacity of goods while aggregate demand is falling, soon enough we will start to worry about deflation, debt deflation, liquidity traps and what monetary policy makers should do to fight deflation when policy rates get dangerously close to zero.
At this point the risk of an imminent stock market crash – like the one-day collapse of 20% plus in U.S. stock prices in 1987 – cannot be ruled out as the financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown.
This disconnect between more and more aggressive policy actions and easings, and greater and greater strains in the financial market is scary. When Bear Stearns’ creditors were bailed out to the tune of $30 bn in March, the rally in equity, money and credit markets lasted eight weeks; when in July the U.S. Treasury announced legislation to bail out the mortgage giants Fannie and Freddie, the rally lasted four weeks; when the actual $200 billion rescue of these firms was undertaken and their $6 trillion liabilities taken over by the U.S. government, the rally lasted one day, and by the next day the panic had moved to Lehman’s collapse; when AIG was bailed out to the tune of $85 billion, the market did not even rally for a day and instead fell 5%. Next when the $700 billion U.S. rescue package was passed by the U.S. Senate and House, markets fell another 7% in two days as there was no confidence in this flawed plan and the authorities. Next, as authorities in the U.S. and abroad took even more radical policy actions between October 6th and October 9th (payment of interest on reserves, doubling of the liquidity support of banks, extension of credit to the seized corporate sector, guarantees of bank deposits, plans to recapitalize banks, coordinated monetary policy easing, etc.), the stock markets and the credit markets and the money markets fell further and further and at accelerated rates day after day all week, including another 7% fall in U.S. equities today.
When in markets that are clearly way oversold, even the most radical policy actions don’t provide rallies or relief to market participants. You know that you are one step away from a market crash and a systemic financial sector and corporate sector collapse. A vicious circle of deleveraging, asset collapses, margin calls, and cascading falls in asset prices well below falling fundamentals, and panic is now underway.
At this point severe damage is done and one cannot rule out a systemic collapse and a global depression. It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging market economies to avoid this economic and financial disaster. Urgent and immediate necessary actions that need to be done globally (with some variants across countries depending on the severity of the problem and the overall resources available to the sovereigns) include:
- another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;
- a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made;
- a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;
- massive and unlimited provision of liquidity to solvent financial institutions;
- public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
- a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;
- a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;
- an agreement between lender and creditor countries running current account surpluses and borrowing, and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.
At this point anything short of these radical and coordinated actions may lead to a market crash, a global systemic financial meltdown and to a global depression. The time to act is now as all the policy officials of the world are meeting this weekend in Washington at the IMF and World Bank annual meetings.