Thursday, November 12, 2009

Roubini says present "economic recovery" is a Bubble

Nouriel Roubini, the economist who predicted last year's Credit Crunch, is predicting another such crisis in the future.

His argument is summarised in an FTarticle here.

In essence, he says that the Carry Trade, leveraged speculation on currency, is pumping up another asset bubble which will inevitably burst, only this time Governments will not have the resources to bail out the bankers, so we will all have to go back to wearing animal skins and hunting mastodons.

In the unlikely event that there are readers to whom these terms will be unfamiliar, what Roubini is saying is that the US financial authority, the Fed, has been buying up debt in order to pump money into the market. Speculators have been borrowing money at negative interest rates of up to 20%. You heard it right - they borrow, and actually get paid to borrow. They are stuffing this cash into risky stock market assets, driving up the stock market, but in a way that does not correlate with the real economy, which is still in the doldrums with unemployment &c. Result - big stock market asset bubble, waiting to burst. The longer the bubble is intact, the bigger the effect when it does go pop.

In that Roubini got it right last time, and in that banksters and politicians show every sign of having learned doodle squit from the Credit Crunch, we must assume that Roubini is (a) right and (b) going to be ignored.

On openDemocracy, Peter Johnson offers some solutions.

He says we should
  1. warn speculators of their risk in order to damp speculation
  2. introduce transparency into financial dealings, so that we know much more about who owns what
  3. separate the classic function of banks (saving and lending) from the speculative function

Not too difficult for someone of average intelligence to grasp.

But much too difficult for a banker to assent to.

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