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Roubini: Economy Undergoing Death by 1000 Cuts

March 10, 2009

Back when hedge fund managers were still riding high, Nouriel Roubini’s forecasts of financial collapse earned him the moniker “Dr. Doom.”  Turns out that Dr. Doom was eerily accurate in his projections, turning previous snicker-ers to sycophants hanging on his every word.  A profile written on him in the NYT Magazine, August 2008, begins with warnings he’d issued two years earlier:

On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.
(read the full article)

Naturally, Roubini now enjoys a new kind of celebrity along with a heavy schedule of speeches, writing, and interviews.  Yesterday, he was a guest on MSNBC and warned that the recession will extend into 2010, and that if stronger measures aren’t taken (by the government), that an “L”-shaped stagflation (as happened in Japan) is in front of us, rather than the “U”-shaped recovery we’ve been hoping for. Flattening any illusion that good times will return, Roubini says that the worst is still yet to come.

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When presumed financial wizards and experts say that they didn’t see the financial meltdown coming — that no one could — it feels like a deer-lick-size piece of salt being ground into a wound. There’s a whole lot of blame to go around, most of which can be hung on the delusion/ideology/myth that significant leverage will predictably yield significant wealth. I don’t know about you, but a visceral  “Are you **!!?* high?” sense of distress screams inside me at such an assumption.

Many describe the “financial instruments” (of mass destruction) engineered in the last decade as too complex to understand, as they were designed, in fact, for opacity.  I’m sure that’s true, but like gravity, there are simple principles that govern wealth creation and its management. Creating capital without any tie to a real asset is just crazy — and that’s not hard to understand.

I often say that, like Rodney Dangerfield, futurists don’t get no respect. The human brain just doesn’t accept what’s not in front of it, and rejects even well-reasoned arguments such as Roubini’s when they’re at odds with present conditions. Fear is hard to grasp when one is insulated by the comfort of big cars, houses, and bank accounts. It’s one of the reasons why humans tend to wait for crises to make changes, and why denial can run so deep.

My advice: 1) subscribe to Roubini’s RGE Monitor newsletter, and 2) start paying futurists the respect they’re due.

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