In my view, the movement in oil prices is not fully justified by the fundamentals.
There are improving fundamentals. There is a global recovery. But that justifies oil going from $30 to maybe $50. I think the other $30 is all
speculative demand feeding on it—speculators and herding behavior. Last year, when oil was at $145, that killed the global economy. I worry that oil
is going to go up above $100 for reasons that have nothing to do with the fundamentals of supply and demand. Oil at $100 would have the same negative
effects on the global economy as oil did at $145 last year.
Last year, when oil was at $145, the global economy was still growing. Right now it has collapsed, and is recovering. Oil pushing above $100 would
have nasty, negative real trade effects and real disposable-income effects on all importing countries: U.S., Europe, Japan, China, India; all the
countries that were hit by the oil shock last year. So that’s an element that is in my view totally speculative, and dangerous to the global
economy.
IU.com: Is that true elsewhere?
Roubini: I could make a similar argument for other commodity prices. In my view, rising commodity prices are not justified by the fundamentals.
There’s a huge bubble, because we have zero rates in the U.S., zero rates around the world and a huge carry trade.
Everyone is borrowing at zero
interest rates in dollars and getting a capital gain because the dollar is weakening, so they are borrowing at negative rates. And then they
invest in risky assets: commodities, equities, credit. We’re creating a bigger bubble than before.
It’s going to go crashing down, in an ugly way. That’s the basics of the argument.
...snip...
IU.com: You recently co-authored a report in which you and your colleagues ranked the U.S. third in world financial markets, after London and
Australia. Was regulation a big component of that?
Roubini:
The U.S. might have been No. 3 overall, but it was ranked No. 38 out of 55 in financial stability, because we’ve had a disastrous
banking and financial crisis. That was in part due to poor regulation and supervision of financial institutions. That’s one of many factors and
reasons why the U.S. was ranked so low on that particular pillar. Certainly there has been a massive failure of regulation and supervision of the
financial system. But the regulatory failure was more in the direction of unwillingness by regulators to apply regulations. The Fed had all the powers
to regulate toxic underwriting of mortgages, but they believed in laissez faire markets, and they created a disaster.
IU.com: How does this get fixed?
Roubini: I don’t believe in market discipline. It doesn’t work. That was the ideology of the last 10 years; self-regulation means no regulation.
Market discipline doesn’t exist with irrational exuberance and reliance on internal risk management models that don’t work.
Nobody listens to
risk managers, because it’s risk takers that make the profits. The reliance on ratings agencies that have their own conflicts of interest, the
reliance on soft-touch regulation, the focus on principles instead of rules—that particular regulatory philosophy has been a disaster, and we’ve
learned it the hard way. We have to go to simpler rules, tougher rules and more binding rules. That’s the right approach.
...snip...
Noeriel Roubini predicted the current crisis long before it really happened. Many saw him as someone not to take serious until the moment that his
predictions came true.
Banks are acting as if nothing happened. Risks are not cared about as profit and materialism remain of greater priority than a stable economy as well
as bankers who simply continue to share out bonuses as if there has never been a crisis.
Our financial system is one huge bubble. We have been at the brink of a collapse and the crisis is all but over. I cannot say how long it is going to
take, but sooner or later our capitalist economy will end up the same way the centrally planned economy of the Soviet Union did.
