The many crises of Nouriel Roubini

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, now he is (rightly or wrongly) portrayed 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. A prime example is Nouriel Roubini, an economics professor at New York University. Roubini has become the face of the crisis and its supposed prophet.

The son of Iranian Jews, Roubini was born in Istanbul. He grew up in Tehran and Tel Aviv before his family eventually moved to Italy where they opened an Oriental rug business in Milan. It was in the chaos of 1970s Italy that Roubini became interested and 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.

Roubini’s economics studies led him from the universities of Jerusalem and Milan to Harvard where he completed his Ph.D. under Jeffrey Sachs. He later taught at Yale and added stints at the IMF, 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, 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. Roubini embodies the old joke that a good economist is someone who accurately predicted nine out of the last two recessions.

Despite his reputation as the person who predicted the crisis, Roubini’s actual forecasting record does not withstand much scrutiny. For a start, Roubini did not accurately predict the recent financial crisis. Roubini 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 eventually unfolded.

One of Roubini’s few specific predictions was that the United States would experience zero GDP growth in Q4 2006. This was far off the mark: the actual result was 3%. After this embarrassment, Roubini 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.’ Roubini 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 Roubini made his most widely quoted predictions about the impending financial Armageddon in 2008. Roubini changed his story to fit what everybody could already read in the financial papers.

If Roubini has a forecasting methodology, it is hard to identify or evaluate. The distinction between opinion and analysis is all too often lost in his hyperbolic prose. That his prophecies are often subjective and not based on systematic evaluations is not even disputed by 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, Roubini sounds bearish as ever, calling for a double-dip recession. At least that’s what his nose tells him.

Dr Stephen Kirchner and Dr Oliver Marc Hartwich are Research Fellows with the Economics Program at The Centre for Independent Studies.