Nouriel Roubini trusts Timothy Geithner to get it right on US banks
Nouriel Roubini can see that the 'N' word might be a little difficult for Western governments to swallow right now. But for him, it's the right – indeed, the only – route to follow.
By James Quinn, Wall Street Correspondent
Last Updated: 2:34PM GMT 16 Feb 2009
Nouriel Roubini predicted the current financial crisis and now argues that many US banks should be nationalised
The "N" word, of course, is nationalisation: nationalisation of failing banks which are continuing to wreak havoc on the world's economies.
"Many US banks are insolvent, even the major ones," argues Roubini, professor of economics and international business at NYU Stern, New York University's business school, without naming names. "Call it nationalisation, or if you don't like the dirty N-word, use 'receivership' or whatever is palatable."
Call it what you want, says Roubini, but without nationalisation of some of the major banks in both the US and the UK, the banking crisis will get worse and the current recession deepen.
"If the problem of banks is one of liquidity, you can do anything you like, which seems to me what the US Treasury wants to do," he says, with reference to US Treasury Secretary Tim Geithner's slightly-fumbled banking bail-out plan launched last week to much disregard from Wall Street.
"But if the banks are insolvent, none of these will work," says Roubini of Geithner's three-part plan which includes stress-testing major banks to see if they need more public capital.
"To see which banks are insolvent, a stress test is a step to making these tough decisions," he says, tough decisions which are so politically charged that they need to be "done right" due to the number of stakeholders involved who face being wiped out if nationalisation were to occur.
"Triage the banks that are solvent but illiquid, and those that are beyond redemption need to be nationalised. But it's urgent to do it sooner rather than later. Let's not wait another 12 months."
Roubini, one of the world's foremost experts on the current banking crisis, argues that until now, the US government, like many of its European counterparts, has been busy "trying to provide manna to everyone" without actually working out who needs what.
So why, given that Geithner appears to know some of what is needed, does Roubini think he didn't go the whole hog last Tuesday?
"The benevolent view of what they've done is realise the problem, but maybe not go as far as they might like to. A month into the [Obama] administration, saying "we're going to take over most of the US banks" because they're insolvent - that might lead to being accused of being Bolshevik," he surmises.
The second reason Geithner may have held back, Roubini adds, is that perhaps he and the rest of Obama's economic team – including senior adviser Larry Summers and chairman of the White House Council of Economic Advisers Christina Romer – were banking on the economy recovering somewhat later in the year, which might lead to less stress being placed on bank assets. "A sense of cautiousness, perhaps?" he says.
Based on Roubini's forecast for the US economy, such caution is perhaps a little unwise.
He estimates that a "broad recession" – will continue well into next year, with some form of recovery into 2011. But even that is not certain, he argues, saying there is a "risk" that the current recession does not create a U-shaped curve as the majority do, but that the US ends up like Japan of the 1990's with "nasty L-shape stagnation."
"In a banking crisis, some banks are so under-capitalised that they might as well just take them over," he argues, pointing out that often it is better from a capitalist-friendly perspective to take them over, clean them up in public ownership, and sell them off again, than it is to leave them flailing for help on the open market.
Roubini, who turns 50 in March, makes his comments with a degree of inside knowledge. Although he is no way connected to the Obama administration – and is an independent economist whose only commercial tie is as chairman of economic analysis firm RGE Monitor – he did work with Geithner at the tail-end of the Clinton administration.
When Geithner was promoted to under-secretary for international affairs, Roubini became his adviser, working together for just under a year.
"I trust him," he says, despite acknowledging that he may not quite have got his ducks in a row yet. "He's someone I know well and I have great respect for him."
Why then did Geithner get it so wrong, with his ill-timed and ill-structured banking bail-out which was in many ways smothered by the ongoing debate on the now-passed $787bn fiscal stimulus package?
"You cannot blame him," says Roubini, pointing out that he's facing the "worst economic crisis since the Great Depression" and also that he is just one of a number of high-level economic advisers working under Obama. Although he does concede that his old boss could have waited for a few weeks to "get it right."
Getting it right, in Roubini's eyes of course, means nationalisation, which will invariably involve Geithner returning to the US Congress for additional funds on top of the existing $700bn bail-out fund. "Sooner rather than later, they'll need more money," estimating that $1 trillion to $1.25 trillion of extra money needs to be injected in to the US financial system to revive it, having previously warned that credit losses from US institutions will total $3.6 trillion by the time the crisis is over.
"If you do it fast, you will get private money. But if you take time, and mix good apples with bad apples, then private investors won't want to get involved," he warns.
Aware that going back to the US Congress for an extra $1 trillion of taxpayer's money will be a hard sell for Geithner, Roubini stresses that sum would not necessarily be the final cost. "That's not necessarily the total loss for the taxpayer, as the net costs are less than the headline number due to interest payments and the hope that most of the capital will be repaid."
"They'll get to that point, it's just a matter of when," shrugs Roubini, who, nationalisation or not, will no doubt be watching the actions of his former boss with keen interest.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4639504/Nouriel-Roubini-trusts-Timothy-Geithner-to-get-it-right-on-US-banks.html
Nouriel Roubini can see that the 'N' word might be a little difficult for Western governments to swallow right now. But for him, it's the right – indeed, the only – route to follow.
By James Quinn, Wall Street Correspondent
Last Updated: 2:34PM GMT 16 Feb 2009
Nouriel Roubini predicted the current financial crisis and now argues that many US banks should be nationalised
The "N" word, of course, is nationalisation: nationalisation of failing banks which are continuing to wreak havoc on the world's economies.
"Many US banks are insolvent, even the major ones," argues Roubini, professor of economics and international business at NYU Stern, New York University's business school, without naming names. "Call it nationalisation, or if you don't like the dirty N-word, use 'receivership' or whatever is palatable."
Call it what you want, says Roubini, but without nationalisation of some of the major banks in both the US and the UK, the banking crisis will get worse and the current recession deepen.
"If the problem of banks is one of liquidity, you can do anything you like, which seems to me what the US Treasury wants to do," he says, with reference to US Treasury Secretary Tim Geithner's slightly-fumbled banking bail-out plan launched last week to much disregard from Wall Street.
"But if the banks are insolvent, none of these will work," says Roubini of Geithner's three-part plan which includes stress-testing major banks to see if they need more public capital.
"To see which banks are insolvent, a stress test is a step to making these tough decisions," he says, tough decisions which are so politically charged that they need to be "done right" due to the number of stakeholders involved who face being wiped out if nationalisation were to occur.
"Triage the banks that are solvent but illiquid, and those that are beyond redemption need to be nationalised. But it's urgent to do it sooner rather than later. Let's not wait another 12 months."
Roubini, one of the world's foremost experts on the current banking crisis, argues that until now, the US government, like many of its European counterparts, has been busy "trying to provide manna to everyone" without actually working out who needs what.
So why, given that Geithner appears to know some of what is needed, does Roubini think he didn't go the whole hog last Tuesday?
"The benevolent view of what they've done is realise the problem, but maybe not go as far as they might like to. A month into the [Obama] administration, saying "we're going to take over most of the US banks" because they're insolvent - that might lead to being accused of being Bolshevik," he surmises.
The second reason Geithner may have held back, Roubini adds, is that perhaps he and the rest of Obama's economic team – including senior adviser Larry Summers and chairman of the White House Council of Economic Advisers Christina Romer – were banking on the economy recovering somewhat later in the year, which might lead to less stress being placed on bank assets. "A sense of cautiousness, perhaps?" he says.
Based on Roubini's forecast for the US economy, such caution is perhaps a little unwise.
He estimates that a "broad recession" – will continue well into next year, with some form of recovery into 2011. But even that is not certain, he argues, saying there is a "risk" that the current recession does not create a U-shaped curve as the majority do, but that the US ends up like Japan of the 1990's with "nasty L-shape stagnation."
"In a banking crisis, some banks are so under-capitalised that they might as well just take them over," he argues, pointing out that often it is better from a capitalist-friendly perspective to take them over, clean them up in public ownership, and sell them off again, than it is to leave them flailing for help on the open market.
Roubini, who turns 50 in March, makes his comments with a degree of inside knowledge. Although he is no way connected to the Obama administration – and is an independent economist whose only commercial tie is as chairman of economic analysis firm RGE Monitor – he did work with Geithner at the tail-end of the Clinton administration.
When Geithner was promoted to under-secretary for international affairs, Roubini became his adviser, working together for just under a year.
"I trust him," he says, despite acknowledging that he may not quite have got his ducks in a row yet. "He's someone I know well and I have great respect for him."
Why then did Geithner get it so wrong, with his ill-timed and ill-structured banking bail-out which was in many ways smothered by the ongoing debate on the now-passed $787bn fiscal stimulus package?
"You cannot blame him," says Roubini, pointing out that he's facing the "worst economic crisis since the Great Depression" and also that he is just one of a number of high-level economic advisers working under Obama. Although he does concede that his old boss could have waited for a few weeks to "get it right."
Getting it right, in Roubini's eyes of course, means nationalisation, which will invariably involve Geithner returning to the US Congress for additional funds on top of the existing $700bn bail-out fund. "Sooner rather than later, they'll need more money," estimating that $1 trillion to $1.25 trillion of extra money needs to be injected in to the US financial system to revive it, having previously warned that credit losses from US institutions will total $3.6 trillion by the time the crisis is over.
"If you do it fast, you will get private money. But if you take time, and mix good apples with bad apples, then private investors won't want to get involved," he warns.
Aware that going back to the US Congress for an extra $1 trillion of taxpayer's money will be a hard sell for Geithner, Roubini stresses that sum would not necessarily be the final cost. "That's not necessarily the total loss for the taxpayer, as the net costs are less than the headline number due to interest payments and the hope that most of the capital will be repaid."
"They'll get to that point, it's just a matter of when," shrugs Roubini, who, nationalisation or not, will no doubt be watching the actions of his former boss with keen interest.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4639504/Nouriel-Roubini-trusts-Timothy-Geithner-to-get-it-right-on-US-banks.html
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