Did Nouriel Roubini predict the 2008 financial crisis? His 2006 IMF speech revisited
Plus, RBA hangs its hat on a peak in inflation
Photo credit: Stephen Kirchner.
Nouriel Roubini spoke via video link at the AFR’s Business Summit this week, which I also attended. Nouriel has long been one of my favourite contrarian indicators. For example, here is Roubini calling for the RBA to hold interest rates steady at its February 2015 Board meeting. Here is the RBA lowering interest rates the next day.
In the mid-2000s, his eponymous macro shop was peddling a thesis in which the US current account deficit would induce foreign capital flight, causing the US dollar to plunge, forcing the Fed to raise interest rates, tanking the US economy. He made similar arguments about Australia and New Zealand. It was a strange thesis, in which everything was shoe-horned into the model of the Asian financial crisis, which was where Nouriel first gained wider attention with a web site devoted to the emerging markets crises of the late 1990s. Nouriel’s first-mover advantage in online macro punditry persists to this day.
The AFR’s preview piece featured Nouriel’s main claim to fame:
At a 2006 address to the IMF, he warned of a massive credit and housing bubble in the United States about two years before the global financial crisis.
The speech has a storied history on the internet. When the fund manager Eric Falkenstein went looking for it in 2010, he came up empty-handed:
In Michiko Kakutani's [New York Times] book review of Nouriel Roubini's Crisis Economics, and in the book's foreword, a September 7, 2006 IMF speech is highlighted as containing specific warnings about US housing, and how this would lead to a financial contagion. This would seem to be highly prophetic. So I went to his website looking for this speech. It linked to something from 2009. To get to this point I had to register at his site, and they sent me an email message, asking what I wanted to know (they seem to sell different levels of access at the Roubini Global Economics--a sort of CNBC with only negative spin). I asked to see the 2006 speech mentioned in the NYT book review, and they pointed me towards a different speech in 2006 that was rather vague. So I asked again for the rather prominent September 7 2006 speech, and they did not answer…Anyway, if anyone has a link to his singular speech, the internet could use it.
For a while, the best we had was a contemporaneous summary in an IMF publication. After Eric wrote about it 2010, the transcript re-surfaced on ECRI’s web site (Nouriel’s respondent on the day of his speech was ECRI’s co-founder Anirvan Banerji).
You can read the transcript and decide for yourself how prescient it was. The thesis Nouriel advanced was one in which the US consumer would become exhausted by higher oil prices, tighter monetary policy and a faltering housing market. It is the housing piece that establishes a connection to the crisis of 2008. Nouriel also said that that a credit crunch was not a necessary condition for a recession, but added systemic financial problems into his laundry list of negatives just the same.
Recall this was September 2006. One of the very few specific predictions Nouriel made around this time with a date attached was that the US economy would experience flat growth in Q4 2006. In the event, the economy expanded at a rate 3.5% in that quarter, as originally reported. Nouriel began hedging his recession call in early 2007. In January of that year, he wrote: