Roubini Sees Global Gloom After Davos Vindication

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Roubini Sees Global Gloom After Davos Vindication
By Simon Kennedy

Jan. 30 (Bloomberg) -- At the World Economic Forum two years ago, Nouriel Roubini warned that record profits and bonuses were obscuring a “hard landing” to come. “I really disagree,” countered Jacob Frenkel, the American International Group Inc. vice chairman and former Israeli central banker.

No more. “Roubini was intellectually courageous, and he called the shots correctly,” says Frenkel, whose AIG survives only on the basis of more than $100 billion of government loans. “He gained credibility, and he deserves it.”

This week, New York University’s Roubini returned to the WEF and the Swiss ski resort of Davos as the prophet of the worst economic and financial crisis since the Great Depression - - joining the ranks of previous “Dr. Dooms” who made their names through contrarian calls that proved correct.

Even as he wins plaudits for his prescience, Roubini, 50, says worse lies ahead. Banks face bigger credit losses than they realize, more financial companies will require state takeovers and the world economy will keep shrinking throughout 2009, he says.

“The consensus is catching up with me, but it’s still behind,” Roubini said in an interview in Davos. “I don’t know what some people are smoking.”

‘Catastrophic’

As long ago as February 2007, Roubini was writing on his blog that “the party will soon be over,” and warning of “painful consequences for the U.S. and the global economy.” By last February, his tone had become apocalyptic, raising the specter of a “catastrophic” meltdown that central banks would fail to prevent, triggering the bankruptcy of large banks with mortgage holdings and a “sharp drop” in equities.

The next month, Bear Stearns Cos. failed, to be taken over by JPMorgan Chase & Co. in a government-backed deal. Then, in September, Lehman Brothers Holdings Inc. went bankrupt, prompting banks to hoard cash and depriving businesses and households of access to capital. The U.S. took over AIG, Fannie Mae and Freddie Mac, and the Standard & Poor’s 500 Index suffered its worst year since 1937.

“I was intellectually vindicated,” Roubini says. “But I was vindicated by having an economic disaster which has political and social consequences.”

Predecessors

Roubini’s predecessors in the role of economic nay-sayer include some well-known names: Joseph Granville, publisher of the Granville Market Letter, who forecast the stock-market declines of 1976 and 2000; Henry Kaufman, who as a managing director at Salomon Brothers projected rising interest rates that led to a U.S. recession in the early 1980s; Marc Faber, publisher of the Gloom, Boom & Doom Report, who predicted the 1987 stock crash; and Yale University’s Robert Shiller, a former colleague of Roubini’s, who forecast the end of the dot-com bubble in his 2000 book “Irrational Exuberance” and said in a second edition in 2005 that the U.S. housing market had undergone the biggest speculative boom in U.S. history.

Granville, 85, says the key to being an outlier is not to doubt your analysis.

“I don’t have anything to do with emotion,” says Granville, who’s based in Kansas City. “Keep your head, follow the numbers and ignore the rest.”

Roubini was born in Istanbul, the son of an importer- exporter of carpets, and spent his childhood in Israel, Iran and Italy. It was while living in Milan from 1962 to 1982, he says, that he became attracted to economics: “Economics had the tools to understand the world, and not just understand it but also change it for the better.”

International Economics

After a year at the Hebrew University of Jerusalem, he earned an economics degree at Milan’s Universita’ L. Bocconi and then his Ph.D. at Harvard University in 1988, where he specialized in international economics.

Jeffrey Sachs, he says, became his “role model” at Harvard by demonstrating that economists could shape public policy -- as Sachs did by lobbying for poor countries to have their debts relieved by richer governments. Sachs is now a professor at Columbia University.

“You sensed there was something beyond academia, that you have to figure out the big issues of the global economy,” says Roubini. “You have to be engaged, and can’t just be in an ivory tower.”

For much of the 1990s, Roubini combined academic research and policy-making by teaching at Yale and then in New York, while also spending time at the International Monetary Fund, the Federal Reserve, World Bank and Bank of Israel.

Joining Clinton

By 1998 he had attracted the attention of President Bill Clinton’s administration, joining it first as a senior economist in the White House Council of Economic Advisers and then moving to the Treasury department as a senior adviser to Timothy Geithner, then the undersecretary for international affairs and now Treasury secretary in the Obama administration.

Roubini returned to the IMF in 2001 as a visiting scholar while it battled a financial meltdown in Argentina. He co-wrote a book on saving bankrupt economies entitled “Bailouts or Bail- ins?” and opened his own global consulting firm, which now employs two dozen economists and publishes a popular Web site and blog.

“Nouriel has a rare combination of economics and the real world, and so has great insight because of that,” says Shiller. “He looks into the details and rolls up his sleeves.”

Roubini says working on emerging-market blowouts in Asia and Latin America allowed him to spot the looming disaster in the U.S. “I’ve been studying emerging markets for 20 years, and saw the same signs in the U.S. that I saw in them, which was that we were in a massive credit bubble,” he says.

Still a Pessimist

With that bubble now popped, Roubini remains more pessimistic than economists elsewhere. The IMF forecasts global growth of 0.5 percent this year and bank losses from toxic U.S.- originated assets of $2.2 trillion. By contrast, Roubini sees the global economy shrinking this year, and banks writing down at least $3.6 trillion -- compared to the $1.1 trillion disclosed so far.

While the U.S. government is resisting nationalizing its biggest banks, Roubini says it will have no choice because they are now “effectively insolvent.” And the outcome may be even worse than even he anticipates if governments fail to take aggressive steps to recapitalize banks and revive their economies, he says: “The risk of a near-depression shouldn’t be underestimated.”

Roubini, who’s now working on a book about the crisis, says he takes no particular pleasure in his role as Dr. Doom or the attention it brings him.

“I’m not a permanent bear,” he says. “I’ll be the first to call a recovery, but I just don’t see it yet, and it’s getting uglier.”

World's Elite Visit Davos in Doubt

http://online.wsj.com/article/SB123291975787013521.html

JANUARY 26, 2009
World's Elite Visit Davos in Doubt
Leaders, CEOs Seek New Model at Forum, as IMF Prepares to Lower Growth Forecast
By MARC CHAMPION

In the 38 years that business and political leaders have been trekking to the Swiss ski resort of Davos to talk about the world economy, the outlook hasn't been bleaker or global capitalism more racked with self-doubt.

Forty heads of state -- compared with 27 last year -- have signed up to attend the annual meeting of the World Economic Forum that begins Tuesday evening with two questions dominating: Just how bad will this global recession get? And what will provide the growth needed to end it?

The International Monetary Fund is recalculating its estimate of global growth and on Wednesday is likely to lower it to less than 1%, similar to what the World Bank estimated last month, according to people familiar with the IMF calculations. The IMF is refining its estimates in light of lower-than-anticipated growth figures last week from China.

"Why are we surprised all the time, almost weekly" by bad financial news, said Victor Halberstadt, professor of economics at Leiden University in the Netherlands and a veteran of the Davos event. "Do we really understand too little about the economy? I'm afraid the answer may be 'yes,' and that is why policy makers are going to Davos."

Davos could mark an opportunity to seek a new economic model, he and others say. "Everyone is at a loss, this is the start of a period of huge improvisation. There is no longer any best practice around to refer to," Mr. Halberstadt says.

Over the years, Davos has become as much a marketing event, where companies look for business and polish images, as the intimate brainstorming venue of the event's early years, when a few hundred executives attended.

The five-day confab, which has signed up about 2,500 participants, will be a more sober affair than usual, organizers say. There are fewer gimmicks -- such as scents pumped into session rooms last year by a high-profile perfumer -- fewer movie stars have been invited, and fewer lavish parties are being thrown by governments and companies. Goldman Sachs won't be holding its usual party this year. "In the current environment, we didn't think it was appropriate," says spokesman Lucas van Praag.

Still, more than 1,400 chief executives and chairmen of companies are making the trip despite the deep slump in corporate revenues and stock markets.

And Davos doesn't come cheap. The annual corporate membership required in order to send executives costs 42,500 Swiss francs ($36,768), plus 18,000 francs to attend the meeting, not including accommodations, according to a Forum spokesman.

There have been gatherings during other economic crises, in the 1980s and 1990s, that seemed severe at the time. But none was so global or open-ended, says Klaus Schwab, who founded the World Economic Forum in 1971 and runs it through a nonprofit organization.

"This is absolutely new in Davos. The only parallel would be in 2002, where people were similarly concerned about terrorism," he says, referring to the Forum meeting that followed the Sept. 11, 2001, attacks on the U.S.

This year, big government looks set to seize the Davos limelight from the banks, hedge funds and sovereign wealth funds that attracted attention in recent years. The reason for this change, economists say, is simple: The taxpayer now holds what money and power remain in an ailing global economy. Many big banks are on government life support and even state-controlled sovereign wealth funds aren't offering capital to struggling Western corporations.

"This may be the first Davos where capitalism is widely viewed as a failure, rather than something to be admired," says Ethan Kapstein, professor of economics and political science at French business school Insead, who has been going to Davos since 1994.

In a sign of the times, many of the financial elite present at past sessions won't be coming this year. Richard Fuld Jr., former CEO of Lehman Brothers Holdings Inc., which filed for bankruptcy in the fall, won't be back this year, according to the organizers. Nor will John Thain, former CEO of Merrill Lynch & Co., who was forced to resign by Merrill's new owner Bank of America last week. One point of contention was that he had scheduled a trip to Davos, even though Bank of America had signaled it wouldn't be a good idea for him to attend.

Citigroup Chief Executive Vikram Pandit and Lloyd Blankfein of Goldman Sachs have chosen to stay home, though they will send other executives. Sir Win Bischoff, Citi's chairman, is scheduled to come, but was told last week he is being replaced at Citi by former Time Warner Inc. CEO Richard Parsons.

B. Ramalinga Raju, former chairman of India's Satyam Computer Services Ltd., was to have been on a panel this year at the Forum, but instead is in jail, arrested in connection with a massive fraud. One banker scheduled to attend, Edgar de Picciotto, chairman of Union Bancaire Privée, lost big -- to the tune of $700 million -- for clients by investing in Bernard Madoff's alleged Ponzi scheme.

The U.S. is likely to be the subject of finger-pointing at Davos, as the country where the global financial crisis started. It is also the focus of most hopes for recovery. Yet the Obama administration is planning to send just one official, White House senior adviser Valerie Jarrett. Ms. Jarrett, a longtime friend of President Barack Obama, is subbing for Lawrence Summers, head of the National Economic Council, and National Security Adviser James Jones, who are remaining in Washington "to advise the president on the near-term issues he must address," according to an administration official.

The headline governmental names this year instead come from emerging markets. China's premier, Wen Jiabao, and Russian Prime Minister Vladimir Putin are to give speeches on Wednesday, at a time when their economies, too, are getting hit hard. Mr. Wen will be the first Chinese leader to go to Davos. The leaders of Japan, Germany and the U.K. speak later in the event.

"The capitalist myth is lovely and youthful. It kicked off the industrial revolution, but maybe we need a new one," says Richard Olivier, son of the late British actor Sir Laurence Olivier. Mr. Olivier, who owns a company that gives seminars, will give a dinner talk on business leadership at Davos, based on Shakespeare's tragedy Macbeth. The tale shows a heroic soldier turned bad, led to self-delusion by his own ambition and greed -- think Lehman Brothers, says Mr. Olivier.

German novelist Thomas Mann called Davos "the Magic Mountain" back when it was a center for tuberculosis cures. Whether people will find the medicine they are looking for at this meeting is doubtful. But Mr. Halberstadt believes it is a good sign politicians want to meet and talk informally at a moment when the globalized economy and its institutions will be under growing stress from protectionism and other threats, as governments respond to domestic pressures.

Amid the bad economic news, Mr. Schwab and others such as philanthropist and Microsoft Corp. Chairman Bill Gates will be pressing governments and CEOs to continue to address and fund other global challenges from climate change to dwindling water supplies to Third World disease. That, say Davos regulars, could prove to be a much tougher sell than a ticket to the Magic Mountain.

Write to Marc Champion at marc.champion@wsj.com

Printed in The Wall Street Journal, page A6