Political Economist

NYU Stern’s Economic Professor Nouriel Roubini Warns of
Dangerous Economic Waters Ahead

Nouriel Roubini

Nouriel Roubini, professor of economics and international business at the Stern School of Business, is author with Brad Setser of the new book, Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies, which studies the currency, financial, and sovereign debt crises in emerging market economies in the last decade. The book also explores the efforts made to resolve these crises via policy adjustment, International Monetary Fund (IMF) “bail-out” packages, and private sector involvement.

Roubini, who received his Ph.D. in economics from Harvard, has been a long-time consultant to the World Bank, the IMF, and other private and public institutions. He has published theoretical and empirical policy papers on international macroeconomic issues, the Asian and global financial crisis, emerging markets, and the reform of the international financial system.

Before joining Stern, Roubini was a faculty member in the economics department at Yale University and has served as the senior economist for international affairs at the White House Council of Economic Advisers, the senior advisor to the under secretary for international affairs, and the director of the Office of Policy Development and Review at the U.S. Treasury Department. He is also chairman of Roubini Global Economics, an economic information and consultancy service.

NYU Today recently spoke to Roubini on teaching at NYU and the future of the U.S. economy.

NYU Today: How does your political experience affect your research and teaching at Stern?
Nouriel Roubini: As an academic researcher, you are not just living in an ivory tower but you are involved in what is happening, regardless of whether you are teaching, doing research, or policy consulting. Because I had been writing extensively about the Asian financial crisis of ‘97/’98, I was asked to join the White House Council. For 20 years the Asian economy had been growing very fast, and then suddenly it goes belly up, and no one understood why. Academics, the IMF, Wall Street, credit rating agencies, and policy makers had not predicted it. I worked on reforming the International Financial System to make these types of crises less dangerous.

When I came back to Stern, a lot of what I wrote was related to financial crises in emerging market economies and reform, which affected how I was teaching my courses. There is no separation between being a teacher and somebody who is involved in the real world. When I think about research, I think about current policy questions and not just academia.

You have researched ways to prevent financial crises for years. How can countries do so?
Crisis prevention, like avoiding a disease, is just making sure that you have healthy habits and a healthy diet and that your economic policies are sound. Usually countries that have a large budget deficit, unsustainable exchange rates, large growing current account deficits, too much borrowing from abroad, short rather than long-term borrowing, foreign currency vs. local currency borrowing, or debt rather than equity borrowing, may trigger people to rush to the exits and thus cause a currency, banking, debt or a corporate crisis.

From what you described, it sounds like the United States could be heading down the road to a crisis.
After I wrote my book on emerging market economies, I realized that the biggest emerging market was the U.S. in terms of its behavior. If the U.S. had been any other emerging market that has a twin deficit (fiscal budget deficit and current account deficit) and short-term financing, it would have gone bankrupt a long time ago. So we have an advantage compared to Mexico or Argentina or some country in Asia in that we have some residual credibility. We have never defaulted on our foreign or domestic debt. The U.S. is still the major reserve currency in the world. We borrow in our own currency rather than in a foreign currency. So those elements reduce our vulnerability, but sooner or later, if you keep this budget deficit and this current account deficit we are going to accumulate too much foreign debt in a short time period. Eventually you are going to have a severe crisis of the dollar and a spike in interest rates, which could lead to an ugly, hard landing of the U.S. economy.

In the short term, it seems like we have weathered recent storms, but looking towards the future, what impact will the hurricanes and the rise in oil prices have on the economy?
I am very worried about a severe economic slowdown in the U.S. Today’s U.S. consumer is over-stretched, shopped out, and has borrowed a lot. Income is high, but the savings rate of the household is now negative—people are spending more than their income, so they are running down their assets or they are borrowing. Housing has done well, but people have borrowed too much against their housing value, and if there is a housing market crash then that can hurt. The Fed has increased interest rates from one percent last year to four percent on November 1, so the burden of debt payments is increasing. You have consumers shocked by high oil prices, Katrina, high interest rates, high debt, and nervousness about where we are headed as an economy. If there is a U.S. slowdown, then there will be a global slowdown, which could mean another recession.

Is there anything that we can do to avoid this?
We need to seriously cut the budget deficit. In my view, cutting the budget deficit means that you cannot control only spending. You also have to divert some of the tax cuts. We have cut income taxes, capital gains taxes, estate tax, dividend tax, etc. Think about the hundreds of billions of dollars lost. Revenues today in the U.S. are as low as they were in the early 1950s as a share of GDP. We have revenues that are four percent of GDP less than spending. You cannot have a government that spends 20 percent of GDP and has revenue of 16 percent. Eventually you go bankrupt. So I think that we need to increase taxes. We’ve made tax cuts that are not sustainable.

Link to http://www.rgemonitor.com/blog/roubini