'Dr Doom' warns banks 'planting seeds' of crisis
Updated on 18 May 2010
Nouriel Roubini, the man whose warnings over the credit crunch were ignored, tells Jon Snow that banks have learned little from the economic crisis and that Europe will probably face a 'double dip' recession.
Jon Snow talked with the remarkable professor Nouriel Roubini, the Iranian-American economist who was almost alone in forecasting the crash in all its horror and dubbed 'Doctor Doom'.
He says we are in a very bad way again - that when to raise interest rates is a very fine judgement but that ideally it will have to be in the next six months and then they may well go on rising.
He warns that there is a "30 or 40 per cent chance" of Europe going into a double dip recession, and that in the next three to five years the Euro zone will be smaller than it currently is and that money alone cannot solve all the problems so, "lots of sacrifices" will be required along the way .
In the interview, which he also covers in his new book Crisis Economics, he warns that the banks have learned little from the economic crisis.
"It's back to business as usual, lots of leverage, lots of risky investments and return to high profits based on subsidies by the government, bonuses, salaries you name it.
"So we're planting the seeds of the next financial asset bubble."
Finally, when asked if we're out of the recession here in the UK the answer is to the point:
"No. We're at the new stage of the crisis. Initially the crisis was excessive debt and leverage of the private sector, houses and financial institutions.
"Now we've socialised many of the private losses, we've put them in the balance sheet of the governments.
"So, this crisis has morphed from private sector debt to public sector debt, that's why we're still in the middle of it."
You can read the interview below or watch the full interview here.
INTERVIEW: NOURIEL ROUBINI
Britain has posted the worst inflation figures for 19 years - are economies being too tolerant of inflation because in effect it gets their debts down?
Certainly, when you're in a situation which many countries including the UK are running very large budget deficits - and last year almost all of the deficit in this country was financed by the Bank of England by printing money equal to the deficit, so there's been a monetisation of this deficit - the value of the currency, the pound, has fallen and through this channel there's been an imported inflation.
Therefore there's a risk of a rise in inflation in this country and one way of financing fiscal deficit is essentially printing money as opposed to issuing debt.
Would you say it's time interest rates went up?
It's a very difficult trade off, because on one side you have rising inflation and we have to start worrying about it.
On the other hand economic recovery is still weak and anaemic so rates should be kept as near as zero.
But with rising inflation we should signal that there should be some monetary tightening further down the line as well.
Down the line means six months?
It depends very much on the degree of the recovery. If inflation remains high and the economy is recovering more robustly than yes there should be an increase in the policy rate.
However there is a risk that we will be in a situation which inflation is going higher but the economy recovery is anaemic - that then would be a tough choice for the Bank of England.
Two years ago you warned there was a 20 per cent chance of a double dip recession. What's the chance today?
In the case of the Euro zone there's a high likelihood of a double dip recession.
Because the recovery is already anaemic and now given the shocks in Greece, Portugal and Spain, the rising interest rates and the lack of business and consumer confidence there's a risk of a further downturn of the economy.
You put 20 per cent on it two years ago what is it now?
It might be a 30 or 40 per cent probability.
The Euro zone has put together this enormous fund of 750 billion Euros, has that changed anything?
This huge fund helps in the margins in the short run but the reality is that these countries face haunting and daunting challenges in terms of reducing the budget deficit, and also restoring competiveness in economic growth in productivity and structural reform.
Money alone cannot resolve these fundamental issues, money alone can help you to have a breathing window to do these reforms.
But these reforms are going to be difficult and painful and there will be lots of sacrifices and still a risk of policy mistakes and failure.
The biggest political argument in Britain is whether to start cutting public spending right now in a big way, or whether that threatens the recovery?
It's a trade off, on one side you need to reduce the deficits starting with cuts in spending because otherwise the risk is interest is going to go up and that's going to crowd out the recovery.
On the other hand in the short term cutting spending, raising taxes might slow growth leading to a continuing of the recession.
But I would say that since the deficit is very large if we don't want to be in a situation where the market is going to start treating the UK like another Greece it's better to front load and make some of that fiscal adjustment early on in a credible way, and also having a plan for medium term fiscal consolidation.
So if there is a credible plan that starts this year and continues in the future, even if it's done gradually, it's going to signal that the country is serious about fiscal austerity.
You were right about the crash the first time around because you saw the bubble that the banks were stoking. Do you see the banks performing in the same way?
Yes in the new book on the Crisis Economics I've written I look at what happened for the last year or so and my sense is that banks have not learned much from this crisis.
It's back to business as usual, lots of leverage, lots of risky investments and return to high profits based on subsidies by the government, bonuses, salaries - you name it.
So we're planting the seeds of the next financial asset bubble.
Are many of those seeds being planted in London?
Certainly London and also certainly in New York. Banks can borrow at nearly zero rates from the government in the US and UK.
They can do risky investments; the reform of supervision and regulation of financial institutions has not yet been implemented in the US, Europe and the UK.
And there is also a risk of rising budget deficits as a public debt. That mixture of easy money, lack of supervision and rising budget deficit could be very dangerous further down the line.
Should there be banking reform?
I'm in favour of breaking banks that are too big to fail because we had to bail them out and its been very expensive. If it was smaller we could just let them go rather than having this fiscal cost of it.
They're too big to fail, but they're also too big to be saved and too big to be bailed out. Many countries and their governments don't have the resources to do it.
Also they're becoming too large and too complex to manage. There's no way a CEO or a board of directors can monitor thousands of different traders and bankers at what they do.
Therefore we have to have them smaller and more controlled. The trouble is that there is a backlash against even moderate reforms.
The lobbies of the financial industry in the UK and US are against even moderate reforms, let alone more radical but necessary things like breaking up too big to fail institutions.
Is the Euro going to survive?
There is a high likelihood that in three or five years time the number of countries that are going to be members of the Euro zone is going to be smaller than today.
Certainly a couple of them look extremely weak and there may be a break up of this monetary union.
Are we through the crisis yet?
No we're at the new stage of the crisis. Initially the crisis was excessive debt and leverage of the private sector, houses and financial institutions.
Now we've socialised many of the private losses, we've put them in the balance sheet of the governments.
So this crisis morphed from private sector debt to public sector debt, that's why we're still in the middle of it.
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