Outlook Money on Crisis Economics
From Outlook Money:
By Rajesh Kumar
In September 2006, Nouriel Roubini, a professor of economics at New York University, speaking at the International Monetary Fund (IMF), warned that the US economy would suffer a once-in-a-lifetime housing bust and a deep recession. The warning was received by the audience with a fair amount of skepticism, as the US economy, though looking a little weak, was still growing, with low inflation and unemployment. But, as events unfolded afterwards, the prediction by Dr. Doom, as Roubini is famously—or infamously— known, started coming true.
Interestingly, though the recent economic crisis has been termed as once-in-a lifetime, or diffi cult to predict, Roubini was not the only whistle-blower. Economists like Robert J. Shiller of Yale University and Raghuram Rajan of the University of Chicago also highlighted different areas of trouble, but, perhaps, only Roubini anticipated the extent of the damage. In the same IMF address he concluded that the financial system could face a systemic risk, and it did. In the words of Nassim Nicholas Taleb, the author of Black Swan and Fooled by Randomness, Roubini was the only professional economist who really predicted the crisis of 2008.
After being one of the most sought-after economists in the last couple of years, Roubini is out with his much-anticipated title, Crisis Economics, which he has written with Stephen Mihm of the University of Georgia, who in August 2008 profi led him for The New York Times.
Crisis Economics, contrary to the mainstream view, argues, with examples from history, that economic crisis is not a Black Swan event, but is commonplace. The first few chapters read like a brief and sharp history of economic thoughts and highlight the rift between the Keynesians and the Austrian school: “The followers of Keynes and Schumpeter don’t talk to each other.” The authors, presumably not in either camp, call this unfortunate, as they argue that “the successful resolution of the current crisis depends on a pragmatic approach that takes the best of both camps.” In other words, the need for bailouts and stimulus spending should not be underplayed, while, in the long term, the inefficient institutions should be allowed to go under.
As the book progresses, without losing touch with history, it gets into the current crisis—how it all started, the faults in the financial system, regulations, loose monetary policy and global imbalances. Although the language is brilliant, the story has been told again and again in the last year or so, both in the form of books and writings by experts in the mass media. The authors could have saved their energy and efforts and, perhaps, could have used them in the latter half of the book to elaborate solutions and discourse on the future of global economics in much greater detail.
The latter half has opinion about how things can be fixed, like the compensation in the financial world, the role of rating agencies as well as the looming sovereign debt crisis.
Writing about India, the authors have praised the conservative stance taken by the Reserve Bank of India, as they noted: “Indian policymakers resisted the attempts to deregulate the financial system, and banks were forced to maintain hefty reserves. Where other countries embraced the mantra of free markets, India kept a tight lid on the financial system.” As a result, India avoided much of the destruction arising out of the developed world, they say.
Crisis Economics, despite dealing with a subject arguably overdone in the last one year, manages to make the mark strongly with its diagnoses and suggestions. After all, it comes from a sage who got everything right much before they actually happened. The book is undoubtedly a value read.
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2 Responses to “Outlook Money on Crisis Economics”
James • June 29th, 2010 at 3:16 am
Dr. Roubini, I am making my way through your book, and just finished chapter 2 on the crisis economists. This is an absolutely amazing look at the different schools of thought, where each comes from, which points remain valid, and how they apply to today’s crisis. Reading this, I feel it is imperative that everybody else read it as well. The movement of “common sense conservatives,” who do not know, or ignore these historical lessons, is really sweeping across the country. I fear this will certainly play a major role in the upcoming mid-term elections, and we may be faced with a congress heavily in favor of abrupt and pre-mature fiscal austerity measures. Is there ANY chance you would be willing to make this chapter available to the public. It would be a great public service, and may draw further interest to your book. If nothing else, it may make it at least plausible that the president is not intentionally trying to destroy the free market, and restore some faith to the economy. PLEASE consider it. And in the mean time, I will continue to tell everybody to buy your book… my goodness I have very little to offer in exchange, haha. Better to make a silly request and be turned down than to do nothing, right?
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