Believe those who are seeking the truth. Doubt those who find it. Andre Gide

Friday, December 18, 2009

Nouriel Roubini (Doctor Doom)

According to CNBC (First in Business Worldwide):

Global markets have rallied "too much, too soon, too fast" this year but a
correction will not happen right away, as a cheap dollar will still encourage investors to seek higher-yielding assets for a few more months, leading economist Nouriel Roubini said Thursday. Roubini, one of the few economists who accurately predicted the
magnitude of the financial crisis
, said the U.S. dollar will eventually recover some of its losses, but only in "six to 12 months from now, not any time soon."

I have nothing against Roubini; doomsayers are a dime a dozen (see my previous post). What I find incredible is how professional columnists at self-proclaimed "leading business networks" mindlessly genuflect at the alter of stopped clocks.

You've heard the old joke about how economists have successfully predicted 10 out of the last 2 recessions. Eric Tyson has a nice little piece claiming that Roubini is among these tireless prognosticators; see here. That's right, Roubini called the recession in 2004, 2005, 2006 and in 2007. As the old saying goes, even a stopped clock is correct twice a day. The puzzle is why there is such a large and persistent demand for stopped clocks.


  1. David,

    What are your thoughts on the Austrian Business Cycle Theory? I ask because it predicts that any artificial increase in credit will eventually lead to a crash, but it doesn't give a time frame. Nor, I don't think, does it give a way of estimating the time frame. It does say that the larger the credit increase the larger the crash.

    Peter Schiff is a known adherent of the Austrian Theory, and he wrote a book in '06 or '07 predicting the crash.

  2. Prof J,

    Peter Schiff? The Peter Schiff who also predicted that the NASDAQ would fall to 500?
    See here:

    Why do you worship at the idol of broken clocks?

  3. David,

    Fair enough; I wouldn't say I worship any human. And I know enough to avoid market timing like the plague.

    Does you opinion of Schiff also give me your impressions of the Austrian Theory?

  4. Oh, and I forgot to mention, too, that I think the Minsky model of credit expansion is quite similar to the Austrian theory.

  5. I can't speak to Roubini, since I don't know him.

    But I know Case and Shiller were predicting a house price "correction" as early as 2002. Prices peaked in 06 and are now back at approximately their 02/03 levels in real terms. Were they correct?

    I don't know Shiller that well, but I know Chip Case and he is a pretty sensible guy. He is not a doomsdayer -- in fact he was on the board of MGIC, which undewrote private mortgage insurance.

    I have to admit that it's extremely bothersome that it appears that excess returns in real estate have been forecastable. This is supposed to be my area of expertise.


  6. Prof J: My critique of Shiff does not extend to Austrian theory in general; primarily because I know very little about this theory. I have read some of Hayek's work and respect it a lot. Can you point me to a piece that summarizes the Austrian theory in a coherent manner?

    Morris: I think we should give Case and Shiller a lot of credit. I admit that I too am uncomfortable with the idea that real estate returns are forecastable. If they are, then this is a great challenge for conventional macroeconomic theory. On the other hand, if these returns are forecastable, can you tell me whether I should be investing in real estate right now or not? (If I lose money on your suggestion, you will pay!!!)

  7. Stopped clocks speak to our inner fears. Maybe.

    Perhaps it is an issue of communication. If an expert says there is a relatively high probability of nasty event X sometime in the near future, nobody listens. But if the 'expert' is much more categoric and drops the implicit second moments stuff and throws in a clear time frame, then journalists and professional gossipers can turn that projection into news that everybody understands.

    The other puzzle I don't get is why do people seem to heavily discount the past to the point that they seem to individually and collectively forget.

  8. I think this link, which includes a (very) brief outline of the theory, provides the best bibliography.

    The one book not mentioned in the link is DeSoto's book "Money, Bank Credit, and Economic Cycles." A .pdf of this book is available from It is a good book regarding the differences between expansion based on savings and 'false' expansion based on fractional (<100%) reserve banking. It is good, not great, because of the heavy reliance on footnotes. It makes it near unreadable in some cases.

  9. Prof J: Thanks for the links.

    So, according to the first article, the Austrian theory postulates the existence of a "natural" rate of interest (or, more generally, a "natural" price system). This "natural" price system appears to correspond closely to the general equilibrium price system in a neoclassical economy.

    Any "natural shock" that hits the economy (in the article, an increase in the propensity to save) may elicit an investment boom. This is what happens in neoclassical theory as well.

    Any "artificial shock," for example, an increase in the supply of government money, may also elicit an investment boom. But this boom will tend to be inflationary and unsustainable. Again, although the details may differ, this is not inconsistent with some version of neoclassical theory (appended to include a role for government money in the economy).

    So, on the whole, I see nothing necessarily wrong with Austrian theory. I suspect that where I might criticize it is that Austrians do not tend to exposit their theoretical models mathematically (or am I wrong on this?). Some "Austrian" writings I have read are strongly critical of mathematical modeling. My own view is that mathematics is a language; and that as with any language, it may be put to good or bad use.

    Anyway, this is what I have gathered from reading the article. What do you think?

  10. Hi David,

    I've been telling my students that (a) if they have decent income certainty and (b) they are afraid of an inflation then they should buy a big house with a big mortgage. Even if the inflation doesn't come, housing is priced right now to provide its historical rate of return.


  11. David, here is Peter's response to that blogger.

    I am not a fan of Roubini but I don't agree with your criticism. The negative consequences of a policy are never immediately apparently the day after implementation, there is nothing wrong with being early.

  12. Pointbite: You've got to be kidding.

    First, he attacks his critic for being "small time" just to set us up with the idea that he is not to be taken seriously.

    Second, he admits that his critic was correct!

    Third, he defends himself not by admitting this; but rather, by listing off a number of other predictions that came true.

    This is just plain rubbish: He no doubt made a million predictions and, naturally, in the time-honored tradition of a fake, only lists the ones that came true. He ignores all his wrong predictions; unless of course, a "small time" guy catches him.

    And finally, I love his statement to the effect that "Greenspan wanted to make sure that my predictions didn't come true."

    What an ego. What an idiot.

  13. The important statement in that video was his decision to price the stock market in gold. Stocks are priced in dollars, so if you debase dollars obviously stocks will appear more valuable... how does that help anyone? His point was that without Greenspan's inflation, of course you won't see the declines in dollar terms, and there was no way for him to predict the extent to which Greenspan would inflate. Actually I don't see anything wrong with his argument. I don't see that 2002 video as negative for Peter.

  14. Pointbite: Out of the many statements and predictions he has made, why do you focus on only one as being "important?" You could have lost money on several of his other predictions; and if you did, you would have considered those predictions to be quite important too!

    And exactly what "Greenspan inflation" are you referring to? My recollection is that inflation was relatively low and stable during his tenure. The US economy grew in real terms too. Are we to construe this episode as some sort of economic disaster?

    Merry Christmas, by the way.

  15. Merry Christmas David.

    I focus on that prediction because it's the focus of your comment (NASDAQ falling to 500). How far did the NASDAQ fall priced in gold? The biggest mistake Peter made was underestimating the flight to dollars in 2008 and the severity of the Asian sell-off, however he did (correctly) state at the time it was temporary and he never pretended (to his clients or anyone else) to be a short term trader. Ultimately on the long term chart, even today (in the case of dollars), those moves are just minor blips. I don't think you're going to get too far attacking his investment record.

    With respect to the "Greenspan inflation" comment we probably have to define "inflation". The Austrian definition, unless I am mistaken, is simply the act of creating money. The whole purpose of dropping interest rates was to facilitate the creation of money. And it worked a little too well, I hope you didn't forget about the housing bubble already! From the Austrian perspective, that's inflation. Also I'm sure Peter would mention the price of gold, even since then gold has never seen a down year. From the Austrian perspective, that's inflation.

  16. I don't know if you have time to watch videos (maybe some of your readers will) but if you really care to understand Peter's view in context I suggest you watch a few youtube clips. There is no question his ego grows every year (it's funny watching the progression on his CNBC clips) but he was almost spot on. It doesn't mean he'll get the future right, but you really can't deny that.

    This is the video that got me interested in his views, it's from early 2006. It's part 1 of 5, watch all of them.

    This is part 1 of 8 of a speech from 2006 about the housing bubble. Watch all 8.

    This is a more recent lecture, I believe earlier this year. If you're only going to watch one of them, probably watch this. It's surprisingly funny given the topic.

  17. David,

    I was away on holiday, so didn't get a chance to respond to you about Austrian theory of business cycles.

    I think you have the right of it, on both counts: the business cycle theory is as you suggest, and not different from neoclassical. The Austrians are (almost cultishly) against mathematics in their research. They prefer to use deductive logic.

    As you point out, though, mathematics is deductive logic using a different alphabet.

    I like Austrian thinking, it is clear and (I think) tends to approach reality. The biggest drawback to the Austrians (including the current crop) is that they took one look at "general equilibrium economics" and rejected it whole-heartedly.

  18. David,

    I am not sure if Roubini is intentionally a doom sayer or that is what he genuinely believes. Perhaps, some people have a more pessimistic personality and others have a more optimistic personality.

    However, if you really want to understand why people listen to doomsayers, you might want to understand why people are religious.
    I think people are driven by all sorts of fears and religion is, by and large, driven by fear. See work by UBC psychologist, Ara Norenzayan. Perhaps, we are hardwired to fear and we want information about our fears.

  19. "The whole problem with the world is that fools and fanatics are always so certain of themselves, but wiser people are full of doubts" A. Einstein