Summary of a public panel on the crisis in New York with Roubini, Krugman, Soros, Bradley and Wells

Author: Nouriel Roubini  ·  May 7th, 2009  ·  256660http%3A%2F%2Fwww.economonitor.com%2Fnouriel%2F2009%2F05%2F07%2Fsummary-of-a-public-panel-on-the-crisis-in-new-york-with-roubini-krugman-soros-bradley-and-wells%2FSummary+of+a+public+panel+on+the+crisis+in+New+York+with+Roubini%2C+Krugman%2C+Soros%2C+Bradley+and+Wells2009-05-07+14%3A14%3A48Nouriel+Roubinihttp%3A%2F%2Fwww.economonitor.com%2Fnouriel%2F2009%2F05%2F07%2Fsummary-of-a-public-panel-on-the-crisis-in-new-york-with-roubini-krugman-soros-bradley-and-wells%2F › Share This Print

Here is below a blogger summary of a public panel on the financial and economic crisis in New York where I was a speaker together with Paul Krugman, George Soros, Bill Bradley and Robin Wells.  The blogger has slightly misreported my views as “things are getting worse and worse slowly” . What I said  – instead – is “things are less worse than before (Q4:2008-Q1:2009), i.e. the rate of economic contraction is slowing down compared to the free fall of the last two quarters.

From Submitted to a Candid World:

Hanging with Paul and George (and a Few Other Econ Wizzes) in the N-Y-C

Last Thursday I hauled my cookies down to the City to attend the PEN World Voices Festival’s installment, “The New York Review of Books: The Economic Crisis and How to Deal with It, featuring a panel of economic, academic, political, and business big-wigs including: Paul Krugman, George Soros, Nouriel Roubini, Bill Bradley, Niall Ferguson, and Robin Wells. Jeff Madrick moderated the discussion and Robert Silvers, editor of the NYRB introduced the event. The Grace Rainey Rogers Auditorium at the Metropolitan Museum of Art was PACKED with — from what I could see — a nice age distribution: 20-somethings through 70-somethings, all appropriately Manhattan chic. Unfortunately, the audience was about as white as a virgin snowfall in Vermont. I saw very few, if any, Latino or Black attendees.

As dull as one might expect a gathering of economists, academics, and one billionaire to be — with their drab grey and navy suits and their frizzled hair and baggy eyes — the discussion was lively and entertaining, with many laughs and several thought-provoking moments. Here’s my summary of what the panelists had to offer.

Bill Bradley

The former senator from New Jersey reminded me immediately of all the reasons why I supported him in the 2000 Democratic primary. He opened the discussion building on the idea introduced by moderator Medrick about whether a “serious mid-course correction” to our current recovery strategy might be needed. Bradley offered a tantalizing alternative to how we are currently dealing with Citicorp, which, with a present market-cap of $17 Bn, has, to date, received about $400 Bn from the government. He said that if by June/July, the PPIP is not moving forward because the stress tests are delayed (or ignored?!), the federal government ought to stop mincing words and buy Citigroup. The government should reorganzine the institution into the good bank/bad bank structure that has been floated for months now and then (!!!) offer a rights offering to the public. Bradley made sure to emphasis the “public” part of his idea. He was explicit in saying the goal was not to carve up the good bank for the sole benefit of hedge funds; rather he wanted regular citizens to become involved in the process. As one of those “regular citizens” who is biting her figurative lip until it bleeds not to give in to the blackest cynicism about the incestuous/inbred relationship between Washington and Wall Street, the idea that I might be invited to participate in rather than be disenfranchised from the recovery of my economy was heartening. Anyway, in Bradley’s plan, the government would have the bad assets — and the time and resources necessary to clean them up over time. The point is, the good bank is up and functioning, releasing credit into the (carefully regulated) market.

Niall Ferguson

I didn’t know anything about Ferguson, but according to Wiki, it appears he’s set up quite a gig for himself. He’s a proponent of counterfactual history, which allows him the latitude to ask (and answer) a lot of “what ifs” in his historical and economic research, enabling him to publish books that apparently satisfy his conservative, pro-imperialism bent. NONETHELESS, he is quite charismatic, obviously intelligent, and a ton of fun to listen to. He stated outright we have witnessed “the end of the age of leverage.” Ferguson is very unhappy with the way the U.S. government has responded. He sees no way to reconcile monetarist and fiscal strategies. The former seeks to lower interest rates; the latter inevitably threatens inflation and, therefore requires interest-rate increases. The two work against each other, making recovery difficult if not impossible. In the meantime, the U.S. government needs to find a buyer for all of the bonds it is issuing, and this time it isn’t going to be China; it likely is going to have to be the Fed. And then what?!

Paul Krugman

No doubt the evening centered on Krugman and Ferguson as foils. (At one point Ferguson summarized fiscal intervention by saying, “If you want to try the Soviet model …”) Krugman answered Ferguson’s assertion that Keynesian policy inevitably will lead to higher interest rates with the global savings glut (and American household savings averaging 4%), there is no upward pressure on interest rates. Rather what might cause problems for interest rates is whether government solvency is called into question. Krugman reiterated the vicious cycle we are currently in: (1) There is a surplus of desired savings globally that should be moved into investments. (2) Investment demand has dried up, fueled in large part by the housing bust. (3) Even businesses that have capital to invest are delaying it because of the drop in consumer demand. And this is happening all over the world, which does tamp the flames of Ferguson’s claim the world is destined to look upon the U.S. government as insolvent.

Please, keep geeking out with me (after the jump)

Nouriel Roubini

Roubini agrees with Krugman that “things are getting worse and worse slowly” … “there are green shoots” of recovery, and while we are not in an outright depression, we are going to feel “recession” for several more months, even up to more than a year. This recession is not “V” shaped (short) or “L” shaped (long, depression); rather it is “U” shaped, with a relatively long bottom. Roubini estimates an upward trajectory will begin sometime in early 2010, but that the rate of growth will be so near zero, we will still feel very much like we are in a recession. This will be true because Asia and, especially, Europe are lagging so far behind in their recovery efforts. Interestingly, Roubini was an early, though lukewarm, supporter of Geithner’s PPIP and stress-test strategy, yet he had no problem telling the audience he agrees that many of our largest banks, certainly among the 19 currently undergoing stress tests, are insolvent. I wish he had discussed in detail (or at all) what he proposed doing about them. He did say we are making and have made mistakes thus far in our handling of the banks. In sum, Roubini disagrees with Ferguson’s characterization that monetary and fiscal policies are hopelessly at odds. He believes both should be stimulating in the short term. He also took issue with Ferguson’s claim that we have seen the end of the age of leverage. We are eye-high in leverage … government leverage, and while we focus on the problems of credit, debt, and leveraging in this crisis, at some point very, very, very soon, we need to shift the focus to building equity.

George Soros

I admit I kept looking at Soros thinking (1) damned affable and (2) down to earth and (3) one time made a billion dollars in one day … He stressed the failure of classical liberal economic theory. The current economic crisis did not result from an external shock; rather, the financial system “collapsed under its own weight.” The governing view has long been the market strives towards equilibrium. It self corrects and is vulnerable only to external irregularities or crises. This paradigm has turned out to be false. The market is inherently volatile, and therefore needs controls. Credit must be regulated. Soros wants to see margin and capital requirements, but he also wants a flexible system that can adjust to meet the “mood of the market” … He talked about how great bubbles are. Of course everyone likes to jump on them. He does, too. That’s how he makes his money! But for as imperfect as the market is, regulators are more imperfect, so we have to be careful not to go overboard with regulation. And while Ferguson tried to underscore the contradiction between monetarist and Keynesian strategies, Soros really nailed the contradiction we need to understand: The short-term reaction the crisis requires is almost exactly the oppositie of the long-term reaction for economic health. Nonetheless, while deflation is a threat in a recession, we likely have dodged that bullet. Certainly a rise in interest rates will “choke recovery,” but make no mistake that stagflation is favorable to what we would be facing if the government had not taken the action it has thus far.

Robin Wells

Wells is an economic researcher at Princeton and a co-author of Krugman’s. She discussed some of the structural elements that made the global crisis happen and can lay fodder for future crises. First, she says it should be no surprise the contraction is slowing down. With the rapid rate of decline over such a short period, if it didn’t slow down, we would soon be knocked back into “the stone age.” After raining on the green shoots, Wells talked about how the U.S. was not the only country living beyond its means and that we were not the only country bound up in a housing bubble (Spain, Iceland, Great Britain, several countries in Eastern Europe). China’s immense savings, fueled by huge trade surpluses with the U.S. drove interest rates down, but it wasn’t only China. Japan and Germany both have large trade surpluses with the U.S. and also had plenty of savings to invest. These persistent imbalances create instances where injection of foreign monies into the market disguises real structural problems. The stock market might be growing, but foreign investment is hiding the problems, for instance, inherent with lower tax revenues. We have complicit cheating as long as we have a global economy that maintains persistent trade supluses and inflexible exchange rates. If we are really going to address the large structural components that make for financial chaos, we must shift priorities: make commitments to pay debt, realize necessary increases in taxes, make potential shifts towards protectionism in some areas.