In the period before the global economic crisis of 2008,
Nouriel Roubini was tagged "Dr. Doom" by many media outlets. The label was often dismissive, but it became
more of a badge of honor after crisis hit.
Roubini has remained vigilant about the vulnerability of the
financial markets. His concern now is a
global depression. In order to avoid
depression, Roubini says there must me a multi-national approach. While austerity measures in many countries
are necessary, he argues that other nations must postpone austerity in order to
inject stimulus into the global economy.
Writing at Project Syndicate, Roubini outlines several other steps:
monetary policy has limited impact when the problems are excessive debt and
insolvency rather than illiquidity, credit easing, rather than just
quantitative easing, can be helpful. The European Central Bank should reverse
its mistaken decision to hike interest rates. More monetary and credit easing
is also required for the US Federal Reserve, the Bank of Japan, the Bank of
England, and the Swiss National Bank. Inflation will soon be the last problem
that central banks will fear, as renewed slack in goods, labor, real estate,
and commodity markets feeds disinflationary pressures.
Third, to restore
credit growth, eurozone banks and banking systems that are under-capitalized
should be strengthened with public financing in a European Union-wide program.
To avoid an additional credit crunch as banks deleverage, banks should be given
some short-term forbearance on capital and liquidity requirements. Also, since
the US and EU financial systems remain unlikely to provide credit to small and
medium-size enterprises, direct government provision of credit to solvent but
illiquid SMEs is essential.
large-scale liquidity provision for solvent governments is necessary to avoid a
spike in spreads and loss of market access that would turn illiquidity into
insolvency. Even with policy changes, it takes time for governments to restore
their credibility. Until then, markets will keep pressure on sovereign spreads,
making a self-fulfilling crisis likely.
Agree or disagree
with Roubini, by proposing specific steps, he does allow for a meaningful discussion. Two big questions raised by his proposals are 1) is a coordinated global
policy possible in today's political climate, and 2) if so, then how might it
come about? Read How to Prevent a Depression
Filed under: Stimulus, monetary policy, recession, fiscal policy, depression, banks, Nouriel Roubini, systemic risk, Europe, US, austerity measures, contagions, project syndicate, depression economics, austerity, financeial system