{"id":1296,"date":"2011-09-25T17:33:30","date_gmt":"2011-09-25T15:33:30","guid":{"rendered":"https:\/\/clusterfamilyoffice.com\/blog\/?p=1296"},"modified":"2011-09-25T17:33:30","modified_gmt":"2011-09-25T15:33:30","slug":"nouriel-roubini","status":"publish","type":"post","link":"https:\/\/clusterfamilyoffice.com\/en\/nouriel-roubini\/","title":{"rendered":"Nouriel Roubini: How can we avoid a second Great Depression?"},"content":{"rendered":"

Today we would like to discuss the arguments put forward by Nouriel Roubini<\/a> in his article \u00abHow to prevent depression\u00bb published this week on the Reuters blog \u00abThe Great Debate<\/a>\u00abLet us remember that Roubini is a highly respected economist who accurately predicted the great financial crisis of 2008, although at the time he was branded as nothing short of a doomsayer, earning himself the nickname \u201cDr Doom\u201d. Subsequent events have shown that this label was, unfortunately, unjustified.\"\"To put it simply, Roubini begins his article by stating that economic data suggest a return to recession in developed economies, with the financial sector trading at levels of stress last seen only after the collapse of Lehman Brothers in 2008. The risks of a financial crisis worse than the one experienced at that time (as it affects not only the private sector but also public finances) are very real. So, what can be done to minimise the downturn, prevent financial collapse and avert an even deeper depression?<\/p>\n

The first step is to recognise that austerity measures have recessionary effects. Therefore, if the European periphery is forced to make cuts to balance its ailing budgets, the stronger countries should postpone their own adjustments in order to provide stimulus measures that offset this forced contraction. But it is not only Germany and other Central European countries with the capacity to do so, but also Japan, the US and the UK that should pull in the same direction.<\/p>\n

Secondly, given that monetary policy has little effect because the problems stem not from a lack of liquidity but from excessive debt and insolvency, restoring credit would be more effective than mere quantitative easing. The ECB should reverse its misguided decision to raise interest rates, without waiting for Draghi to take over, in order to preserve Trichet\u2019s personal pride, as he is reluctant to make such a U-turn. The Fed, the BoJ, the BoE and the SNB also need to provide greater monetary and credit easing. Because inflation will be the least of the central banks\u2019 worries when prices, wages, property values and so on fall.<\/p>\n

Thirdly, to restore credit growth, under-capitalised banks in the Eurozone must receive capital through a comprehensive programme set up ad hoc by the EU. To prevent another credit crunch whilst the banking sector deleverages, certain breaches of liquidity requirements must be tolerated. Governments must also provide direct credit to SMEs, given that the banks are not doing so.<\/p>\n

Fourthly, the provision of large-scale liquidity to solvent governments is vital to prevent spreads from widening and governments from being cut off from the markets (Italy and Spain). This would turn illiquidity into insolvency, although it may be that liquidity is merely masking the insolvency that already exists. Even with policy changes, it will take years for countries to regain credibility and, in the meantime, the markets will continue to exert pressure on sovereign risk premiums, thereby fuelling the crisis.<\/p>\n

Today, Italy and Spain are already losing their access to the market (they would have lost it by now had it not been for the ECB\u2019s purchases<\/a>). And it is already an open secret that the funds needed to prevent this must be tripled, significantly increasing the EFSF\u2019s (European Financial Stability Facility) capacity to inject liquidity, through Eurobonds or massive interventions by the ECB. Only in this way will we prevent these countries from sliding towards collapse.<\/p>\n

Fifth, debt that cannot be serviced through growth, savings or inflation must be resolved through a structured default, debt reduction (haircuts) and debt conversion. Insolvent governments must be assisted in this process, whilst at the same time providing support to financial institutions and other private debtors.<\/p>\n

Sixth, economic growth in countries such as Greece and other peripheral nations will not take place until competitiveness is restored in their economies. And without a swift return to positive economic growth, bankruptcies and social unrest are inevitable.<\/p>\n

We have three options for restoring competitiveness in the Eurozone, all of which require a real devaluation, and none of which seem viable:<\/p>\n

    \n
  1. A collapse of the euro<\/a> until it reaches parity with the dollar, which is no easy task given that the US currency is unlikely to appreciate easily.<\/li>\n
  2. A rapid reduction in labour costs, achieved through structural reform and increased productivity. This does not seem feasible either, as it took 15 years for that process to restore Germany\u2019s competitiveness.<\/li>\n
  3. Sustained price deflation<\/a> for at least five years, down to levels of 30%, which would amount to five years of depression deemed unacceptable by society. This would exacerbate insolvency, causing the value of debts to rise comparatively.<\/li>\n<\/ol>\n

    As none of these three options appear to be viable, the only alternative is the Greece\u2019s exit from the Eurozone<\/a> and a few other peripheral members. Only a return to the national currency, through its immediate devaluation, can restore competitiveness and growth to those countries. The problem is that this solution requires courage. And those in power may prefer to keep kicking the can down the road until it hits the wall<\/p>\n

    \"\"Leaving the euro would, obviously, cause collateral damage to the countries leaving, and the risk of contagion to the other weak countries remaining within the union would be high. The debt of the countries leaving would have to be converted back into the new\/old local currency through an orderly and negotiated process. Appropriate use of public funds would then be required to recapitalise the banks in the Eurozone, thereby preventing uncontrolled contagion.<\/p>\n

    Seventh, the reasons for high unemployment and low growth in developed countries are structural, and this includes emerging economies that have already achieved developed status. The appropriate response to such drastic changes is not greater protectionism. Developed countries need medium-term plans to restore employment and competitiveness through massive investment in education, improvements in human capital and on-the-job training, infrastructure and the development of alternative and renewable energy sources. Only such planning will provide workers with the tools to navigate this extremely difficult process.<\/p>\n

    Eighth, emerging economies have greater room for manoeuvre and should ease their monetary and fiscal policies. The IMF and the World Bank can lend to emerging economies at risk of losing access to the markets, in exchange (as is being sought in the Eurozone with Greece) for appropriate reforms. Countries such as China must also speed up their reforms so that their economy ceases to rely so heavily on exports, thereby boosting domestic demand and consumption. Consequently, they must also accelerate the appreciation of their currency.<\/p>\n

    The risks we face are not merely a double-dip recession, but a severe contraction that will lead us into the Great Depression II, particularly if the crisis in the Eurozone spirals out of control and triggers global financial contagion. The misguided policies during the Great Depression I led to trade and currency wars, uncontrolled bankruptcies, deflation, poverty, despair, and political and social instability. And this probably fuelled the rise of totalitarian regimes that led us into the Second World War. The best way to avoid the risk of repeating that sequence is to coordinate a very powerful and aggressive global policy now.<\/p>\n

    Via Bloomberg: The Great Debate<\/a><\/p>","protected":false},"excerpt":{"rendered":"

    Hoy queremos comentar los argumentos que esgrime Nouriel Roubini en su art\u00edculo \u00abC\u00f3mo prevenir una depresi\u00f3n\u00bb de esta semana en el blog de Reuters \u00abThe Great Debate\u00ab. Recordemos que Roubini es un prestigios\u00edsimo economista que predijo perfectamente la gran crisis financiera de 2008, aunque en aquel momento se le tach\u00f3 de agorero para arriba, gan\u00e1ndose […]<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[38,51,45,41,42,40,48],"tags":[],"class_list":["post-1296","post","type-post","status-publish","format-standard","hentry","category-actualidad","category-banca","category-asesoramiento-deportistas-artistas","category-economia-y-finanzas","category-estrategia","category-gestion-financiera","category-asesoramiento-patrimonial-multi-family-office-crear-mi-propio-family-offices"],"_links":{"self":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/1296","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/comments?post=1296"}],"version-history":[{"count":0,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/1296\/revisions"}],"wp:attachment":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/media?parent=1296"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/categories?post=1296"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/tags?post=1296"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}