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Nouriel Roubini's Global EconoMonitor

A Chat with Nouriel Roubini and Sebastian Mallaby on the Future of Finance

On the two year anniversary of the collapse of Lehman Brothers, Sebastian Mallaby, the Director of the Maurice R. Greenberg Center for Geoeconomic Studies and Paul A. Volcker Senior Fellow at the Council on Foreign Relations, sat down with Nouriel Roubini at RGE’s New York headquarters on Morton Street for a spirited discussion on the future of finance.   

In light of the recent news out of Basel calling for more stringent capital regulations, the first question posed by Christian Menegatti, head of global research at RGE, was whether the authorities learned how to avoid another financial crisis. Mallaby smiled and quickly responded, “That is easy: No.”  Mallaby fleshed out his response by contrasting the Lehman collapse with the large hedge fund non-collapse a couple of weeks later of Citadel.  While Citadel was highly leveraged and had liquidity issues, the fact that it was not covered by the safety net constructed by regulators forced it to better manage its risk, preventing its collapse and avoiding a systemic problem.  He asserted that Basel III would not be any more successful than Basel I and II because at the end of the day banks are too incentivized to be highly leveraged, as leverage is ultimately subsidized by the government.

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Roubini agreed, mostly, with these ideas and added that the issue is with institutions that are too big to fail and too complex to be managed.  As he points out in his latest book, Crisis Economics, the market system is prone to boom and bust cycles and resolving these institutions in the middle of a crisis won’t work.  Consequently, these large institutions should be broken up, or forced to maintain more capital, which would cause them to split themselves up.

The discussion wended through to the shadow banking system and the future of hedge funds. Mallaby, the author of the recently published More Money than God: Hedge Funds and the Making of a New Elite, made the point that hedge funds, because they are unregulated and thus self-disciplined, are in fact a stable part of the financial system and that we mustn’t be anti-financial sector.  While there are no guarantees that institutions won’t fail, we must ensure that they are fail-safe and hedge funds are small enough that they are safe to fail—but we must be cautious as they grow.  Roubini agreed and provided some comic relief with an anecdote about how he was a consultant to Oliver Stone on his upcoming movie “Wall Street: Money Never Sleeps,” in which Roubini makes a cameo appearance playing himself.  He recounted that originally a main part of the script was about evil hedge funds, but Roubini redirected the focus to where the problem was actually coming from: the traditional banks.

The conversation turned to the general outlook for advanced economies and emerging markets and to more specific questions like the timing and process of future QE.  Perhaps the most interesting question, at least in its phrasing, was, if we could clone multiple Roubinis and have them as President, Treasury Secretary and Chairman of the Fed—what would you do?  Roubini discussed the need for effective stimulus in the short-term and fiscal austerity in the medium-term as well as the importance of investment in human capital (for much more detailed analysis on this, see Approaching a Dangerous Stall Speed and The U.S. Should Ignite Job Creation with a Temporary Cut in Payroll Tax, available to RGE clients).

The evening concluded with refreshments and pockets of conversation between guests and RGE analysts.  Naturally, we were all left with much to think about.

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4 Responses to “A Chat with Nouriel Roubini and Sebastian Mallaby on the Future of Finance”

GuestSeptember 22nd, 2010 at 9:37 pm

If i am informed correctly: Mr. Roubini is a member of the CFR himself. If that is true then it would be helpful to mention that.

sSeptember 23rd, 2010 at 7:22 am

Summers: Good RiddanceThe change people voted for never appeared, and the Summers led economic team gave us two more years of Bush bailout policies. For that humongous error, his departure is a welcome change.http://www.roubini.com/us-monitor/259669/summers__good_riddanceEarly in Obama’s term, when I learned whom he appointed at the financial top (Summers, Geithner, Bernanke..) my first reaction was: no change here, Obama preaches change while protecting a hopelessly corrupt financial establishment. A status quo in the financial exploitation of the American citizen. With the blessings of the political top.We’re nearly half his first term now, and these things are finally reaching the public’s attention. Too late, damage is done. We know where Obama and his appointees stand for.

sSeptember 28th, 2010 at 9:54 am

More on the (near) future of finance by the Bank of England: Savers told to stop moaning and start spendingSavers should stop complaining about poor returns and start spending to help the economy, Charles Bean, the deputy governor of the Bank of England official warned today.By Robert Winnett and Myra ButterworthPublished: 10:03PM BST 27 Sep 2010http://www.telegraph.co.uk/finance/personalfinance/savings/8028884/Savers-told-to-stop-moaning-and-start-spending.htmlMr Bean said low returns on savings were part of the Bank of England’s strategy. Older households could afford to suffer because they had benefited from previous property price rises, Charles Bean, the deputy governor, suggested.They should “not expect” to live off interest, he added, admitting that low returns were part of a strategy.http://www.telegraph.co.uk/finance/personalfinance/savings/8028884/Savers-told-to-stop-moaning-and-start-spending.htmlClear language, no? And this is only a part of the strategy. What else?