Published in The Age (Melbourne), 10 September 2009
By Stephen Kirchner and Oliver Marc Hartwich
It is not only banks’ balance sheets that have suffered in the global financial crisis. Many professional reputations have also taken a battering. While former Federal Reserve chairman Alan Greenspan once appeared to be an economic wizard, he is now portrayed (rightly or wrongly) as a monetary villain.
Where investment bankers were seen as the ”masters of the universe”, they are now almost as unpopular as bank robbers.
But if the crisis has made mortals out of former heroes, it has occasionally worked the other way as well. People who used to be regarded as cranks have been elevated to gurus.
An example is New York University economics professor Nouriel Roubini, who has become the face of the crisis and its supposed prophet.
The son of Iranian Jews, Professor Roubini was born in Istanbul. He grew up in Tehran and Tel Aviv before his family moved to Italy and opened an oriental rug business in Milan. It was in the chaos of 1970s Italy that he became involved in left-wing politics. He later said that it was this political background that sparked his interest in economics. ”I was socially conscious; I wanted to make the world a better place,” he told one interviewer.
Professor Roubini’s economics studies led him from the universities of Jerusalem and Milan to Harvard, where he completed his PhD under Jeffrey Sachs. He later taught at Yale and added stints at the International Monetary Fund, the Federal Reserve and the World Bank to his CV.
Yet it was not so much his academic credentials that brought him fame but his consistently bearish economic forecasts, published on his own website. For years, Professor Roubini warned of the economic disasters and catastrophes that he saw lurking in nearly every country and asset class.
It was only a matter of time before one of these prophecies would come to eventuate. Professor Roubini embodies the old joke that a good economist is someone who accurately predicted nine out of the past two recessions.
Despite his reputation as the person who predicted the crisis, Professor Roubini’s forecasting record does not withstand much scrutiny. For a start, he did not accurately predict the recent financial crisis. He was consistently bearish on the US economy between 2004 and 2007 when it enjoyed strong economic growth.
For years, he argued that the US current account deficit would lead to a US dollar crisis and higher interest rates, pushing the US economy into recession. But that was not how the financial crisis unfolded.
One of Professor Roubini’s few specific predictions was that the US would experience zero GDP growth in the fourth quarter of 2006. This was far off the mark: the actual result was 3 per cent. After this embarrassment, he backed away from his recession prediction, writing in January 2007 that ”it is not clear whether the bust of the housing bubble in the US will lead to a soft landing as the consensus view goes or a hard landing that could take the form of a growth recession or, less likely now, an outright recession”. The professor was hedging his bets in early 2007, clearly uncertain about the direction for the US economy.
The financial crisis was already well under way by the time he made his most widely quoted predictions about the impending financial Armageddon in 2008. He changed his story to fit what everybody could already read in the financial papers.
If Professor Roubini has a forecasting methodology, it is hard to identify. The distinction between opinion and analysis is too often lost in his hyperbolical prose. That his prophecies are often subjective and not based on systematic evaluations is not even disputed by Professor Roubini himself. Asked about his method, he told an IMF conference in September 2006 that he pulled his forecasts ”just out of my nose”.
These days, despite the first green shoots appearing in the world economy, Professor Roubini sounds as bearish as ever, calling for a double-dip recession. At least that’s what his nose tells him.
Doctors Stephen Kirchner and Oliver Marc Hartwich are research fellows with the economics program at the Centre for Independent Studies.