Question: Why were you able to connect the dots when so many of your colleagues were not?
Nouriel Roubini: Well first of all I was not the only one. In my book I recognized another dozen analysts, economics and others from Steve Roach, to David Rosenberg, to Ragu Rajan, to Ken Rogoff that they discussed many of these elements of these imbalances. So the were a number of us even in the policy community, people like Bill White of the BIS. And these are all people that have been studying usually financial crisis for a while. They know the history of financial crisis. They know them across the world.
You take any textbook of economics undergraduate, master, PhD level there is not usually even a single chapter about economic and financial crisis. They’re taught as being kind of freak events that occur once every 100 years—as economists say, 20 standard deviation away from the mean—but these things are occurring every other year, more frequently, more virulent and more severe in terms of their own economic financial cost in advanced economies, in emerging markets. If you look even at the history of just the last 30 years you see dozens of these episodes.
So there are economists first of all that have been studying them. They’re attune to them and the mainstream profession thinks always as the economy being an equilibrium, markets being rational and being efficient. The whole point about the bubble is that the price of an asset is about the fundamental value, so there is a market failure or inefficiency, so you start to think outside of the mainstream. You start to think about this equilibrium and imbalances and asset bubbles and credit bubbles, and then you can make sense of these things. And there are many economists who have been doing so and those who have been doing so can see these things coming earlier than the rest of them.
The other point about the bubble and why nobody gets them, usually very few is that... the issue is not why myself or a few others got them, but why most the people, not just economists don’t see them coming. And I think there is an element that when... there is a bubble. Everybody lives in a bubble. A U.S. consumer could spend more than their income by using their homes as ATM machine. Politicians were happy because the economy was growing and they were getting reelected. Wall Street and The City were making gazillions of profits by creating all these toxic instruments and securitizing them. Rating agencies were making a fee out of their own things. Everybody. And the regulators were asleep at the wheel and the central banks were feeding these bubbles through their own easy monetary policy, so whenever there is a bubble literally people live in a bubble. They don’t live in reality and the delude themselves that things are unsustainable like tech stocks doubling every year in the '90s or home prices rising 20% every year in the last decade—that things that are unsustainable can go on forever. People saying... silly books written in 2000, Dow at 36,000. Or books written by cheerleaders of the real estate industry saying home prices are going to go on forever higher and higher and so on and that this was not a bubble. So people really live in a bubble when there is a bubble and they delude themselves that the bubble can continue forever.
Recorded November 30, 2010
Interviewed by Peter Hopkins