Nouriel Roubini Says: "I Told You So!"
Well, he didn't quite tell us so. But close enough:
RGE - Revisiting Predictions Made a Year Ago: Who is on Earth, on the Moon and Who was a “Lunatic”: This author spent the last weekend in Washington at the annual meetings of the IMF to make several presentations and get a sense of the views of policy makers, scholars and market participants about the US and global economy prospects. To get the sense of the overall mood... Vitorio Corbo - the distinguished governor of the Chilean Central Bank - was asked what were the mood and views of policy makers and market folks. His reply was along the following lines: “Usually at this kind of meetings I used to hear that the views of Nouriel Roubini about an impending financial and real hard landing are from the Moon. But this year there are plenty of “lunatics” around!”... [V]iews that a year ago were considered way off consensus and "from the moon" are now becoming consensus....
[H]aving a little more than a year passed since this blogger first made in August 2006 his call for a 2007 housing bust, financial turmoil, credit crunch and hard landing (recession) for the U.S. economy it is worth revisiting such a call.... At that time [I] argued that: * the U.S. would experience its worst housing recession in decades; * home prices would follow sharply (at least 20% in the next few years); * the housing troubles would start in the sub-prime mortgage market and lead to move severe problems and a credit crunch in broader mortgage and credit markets; * housing woes would spillover to the rest of the economy and to other components of demand - including consumption - via a variety of channels; * multiple bearish factors (housing slump, credit crunch, spillovers of housing to other sectors, high oil prices) would lead to a hard landing of the economy in 2007; * the world would not decouple from such a U.S. hard landing. Such views were very much out-of-consensus and controversial.... [M]ost mainstream analysts got it wrong about housing, its financial fallout and the credit crunch. As the IMF host kindly put it in introducing this author at his recent September 2007 talk at the IMF:
today I am glad to welcome Nouriel Roubini back here to the Fund. …As a prologue I thought I would just briefly recall what he said at this time last year, at least my memory of what he said this time last year which may a little bit biased, and compare it to what has actually happened. Let me recall three predictions. First, Nouriel said that the U.S. housing correction would not go away quietly, but would go from bad to worse, and I think in this he has certainly been right on the nose. Second, he said that weakness in the U.S. subprime mortgage market would cause broader problems in the financial system, and here again Nouriel was certainly right, although for once perhaps not quite gloomy enough. (Laughter.) I think like most of the rest of us, I am not sure that Nouriel fully anticipated the extent of the damage that would be caused. Third, he put a high probability on the risk of a recession in the United States and a global hard landing. This has not happened yet. In fact, the U.S. economy continued to grow at a moderate pace over the past year at around 2 percent, and the global economy has accelerated. But the game ain't over yet, and we are again at a time when there is a lot of concern about recession risk.
This analyst still holds the view that the US will experience a hard landing that is already in the making.... Indeed, in August 2006 (not today) when the conventional wisdom and consensus was of “housing slowdown” and no one had heard of “subprime” this analyst wrote the following about the reckless lending practices in subprime and mortgage markets:
The scariest thing is that the gambling-for-redemption behavior... are not the exception in the mortgage industry; they are instead the norm. There are good reasons to believe that this is indeed the norm as lending practices have become increasingly reckless in the go-go years of the housing bubble and credit boom. If this kind of behavior is – as likely – the norm, the coming housing bust may lead to a more severe financial and banking crisis than the S&L crisis of the 1980s.... [A] serious housing bust followed by an economy-wide recession implies serious financial risks for the entire financial system, not just risks for the real side of the economy. A systemic risk episode triggered by a housing bust cannot be ruled out.
Indeed, a year later we have now seen the biggest housing recession in US history that is getting worse by the day, a collapse and total meltdown of the sub-prime market, the beginning of a massive credit crunch in near prime and prime mortgages and a massive episode of financial volatility and turmoil taking the form of a severe liquidity and credit crunch....
[T]oo bad that too many analysts did not have the willingness to engage in a more intelligent discussion of the risks of the housing recession, its financial fallout and of its impact on the economy. So now some of the same critics have to play catch up with reality as the facts on the ground have repeatedly proven them altogether wrong on many of their consensus views: the housing recession did not bottom out; its spillovers to other sectors and final demand were not modest; the subprime did not turn out to be a niche and contained problem; the financial contagion and credit and liquidity crunch has been severe and persistent; the Fed did not raise rates as the “inflation hawks” worried its should but it was rather forced to cut the policy rates; and the risk of a hard landing were not minimal; they were large then and are sharply rising now. As for decoupling of the rest of the world from the US slowdown this author argued as early as August of 2006 - and again throughout the fall of 2006 - that the decoupling view was conditional on the US achieving a soft landing.... But back to the present now. In his recent IMF talk... this author fleshed out again and elaborated the arguments for a U.S. hard landing... we will soon see a worsening of the liquidity and credit crunch and will experience a generalized credit crunch; and that monetary policy or shell game schemes like the Super-Conduit will not rescue the financial system or the real economy from such a hard landing.... Petty critics of this blogger keep on hammering (in comments on this blog) that the recession did not occur by Q2 of 2007. But, as the Bible put it: “Why do you notice the splinter in your brother's eye, but do not perceive the wooden beam in your own eye?” Indeed, most of these soft landing optimists kept on predicting a modest housing slump that would bottom out by early 2007; they kept on repeating the mantra of subprime as a “niche problem” that would “remain contained”; they dismissed concerned about a severe financial contagion and the risk of a liquidity and credit crunch; they kept on predicting sustained growth rates above 3%...
