George Selgin on Nouriel Roubini’s Book and Nouriel Roubini the Insider

Economist George Selgin takes down Nouriel Roubini and Stephen Mihm’s analysis of the US mortgage crisis of 2007-2008 (source: The Independent Institute)

(all bold emphasis mine)

Abstract

Nouriel Roubini and Stephen Mihm rightly castigate the Federal Reserve and other central banks for policies that contributed to the recent worldwide housing boom and bust, but they seriously underestimate the role of the Community Reinvestment Act and the government-sponsored enterprises in facilitating the surge of subprime mortgage loans in the United States. In addition, their proposals to prevent future financial crises rest on errors about the repeal of the Glass-Steagall Act and other matters of economic history.

Article

It takes only three paragraphs for Nouriel Roubini and Stephen Mihm, the authors of Crisis Economics: A Crash Course in the Future of Finance, to tell how Roubini stunned listeners at a September 2006 International Monetary Fund seminar by heralding a “once-in-a-lifetime” housing bust to be followed by a deep, long recession (Roubini and Mihm 2010, 1–2). Yet they may still deserve credit for modesty, for if one devoted Roubini watcher is to be believed, “Dr. Doom” actually predicted no fewer than “48 of the last 4 recessions” (comment on Elfenbein 2009). Some quick fact-checking lends credence to our informant’s otherwise incredible claim by showing that Roubini predicted a serious crash for 2004, then a severe slowdown for 2005, then a global reckoning for 2006, and finally a sharp recession for 2007. After the much-trumpeted crisis at last materialized (though not quite for the reasons Roubini had harped on), he declared that the S&P 500 would sink to 600, that oil would get stuck below $40 a barrel, and that a gold “bubble” was about to do what the housing one had done. To be sure, these things have not yet come to pass, but tomorrow is another day, and to succeed prophets need only mark when they hit and never mark when they miss.

If Roubini’s marksmanship impresses you, you are perhaps bound to hang on every word of Crisis Economics, no matter what any less-than-divine reviewer says about it. If, on the other hand, that marksmanship puts you in mind of the accuracy of a stopped clock, you may hearken to the warning that although the book’s assessment of the causes of the recent great housing boom and bust is for the most part sound and informative, some of its claims are highly misleading, if not simply false. Roubini and Mihm start well enough by dismissing as red herrings various popular diagnoses of the crisis, including the “tired” argument that it was caused by “greed,” with its far-fetched though implicit assumption “that the financiers of 2007 were greedier than the Gordon Gekko’s of a generation ago” (pp. 31–32). They draw attention instead to changes in the structure of incentives “that channeled greed in new and dangerous directions” (p. 32). These changes included government policies aimed at increasing poorer (and riskier) persons’ access to mortgages, the growing moral hazard connected with the “too big to fail” doctrine, and the Federal Reserve’s post-2001 easy-money policy.

Read the rest here

My additional comments on the celebrity guru:

It has been a long curiosity for me why many people seem to adore someone who has had a sordid string of utterly wrong predictions or maintains a poor batting average in predicting events (as Mr. Selgin points out).

Media seem to remember his ‘broken clock’ accurate prediction of 2007, but have been lenient or forgetful or forgiving of his blatant miscalls. As a saying goes, even the broken clock can be right twice a day.

A good example of this was the controversial debate with the legendary investor Jim Rogers where Mr. Roubini said that gold prices won't reach $1,500 to $2,000 which has obviously been proven wrong.

If Mr. Roubini had been a money manager he would have been a mediocre. Except that he isn’t. So wrong calls does not translate to any real or dollar value losses, so he can afford to keep talking.

One reason that makes Mr. Roubini a celebrity is that his themes sells to the consensus or that he provides the public a ‘confirmation bias’ or that his ideas seem to tailor fit with mainstream’s biases.

Recently Mr. Roubini commented

So Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand.

Here Mr. Roubini passes the proverbial hot potato blame on the free markets which liberals would gladly rally to and cheer on.

Nevertheless what has sorely been missed in this commentary is that the main source of malignancy can be traced to mostly central banking boom bust policies and other interventionist-welfare-bailout programs, an aspect Mr. Roubini and his ilk chooses to ignore.

Economist Bob Wenzel is right; Mr. Roubini’s real value isn’t his economic expertise but his insider connection. Writes Mr. Wenzel,

The one point I do take away from Roubini's commentary is in the area that he has demonstrated expertise and that is not in the area of economic theory. He is an expert in knowing what insiders are plotting. In the vernacular of the day, he knows what is coming down.

Mr. Roubini seems part of the counsel which help shapes the ‘insider’ philosophy and who provides the ideological cover to promote the 'insider's' interests.