How seriously should we take Roubini's doomsday predictions?

Economist Nouriel Roubini is back on the circuit with his Doomsday predictions. In an interview to WSJ.com , ‘Dr Doom’ prophesies that there is now a greater than 50 percent risk of a global recession, and that this is not the time to be invested in risky assets.

Given Roubini’s reputation as the man who rightly called the 2008 meltdown, his recession call adds to the clutch of negative sentiments that hang over the global economy. Although the chatter about a double-dip recession in the US is beginning to acquire higher decibel level, Roubini is among the earliest to extrapolate it to the global economy.

At a reflexive level, Roubini’s prediction seems very intuitive. The economies of both the US and Europe are in turmoil, with governments having to deal with their mountains of debt, which will force them to cut back on spending. And since any spending cut will be deflationary to an economy that is already sputtering, the risks of a recession are substantial.

[caption id=“attachment_59713” align=“alignleft” width=“380” caption=“When Roubini speaks of the risks of a global recession, he is signalling that growth in emerging markets won’t be robust enough to compensate for the recessionary impact of the US and Europe.AFP”] [/caption]

When Roubini speaks of the risks of a global recession, he is perhaps signalling that growth in emerging markets, particularly India and China, won’t be robust enough to compensate for the recessionary impact of the US and Europe. That’s a sobering thought for anyone who nurses fantasies that China and India will “save the world”.

But how seriously should we take such depressing outlooks from Roubini and other Prophets of Doom? Why should we believe economic Doomsayers when remain skeptical of someone who has an uber-bullish outlook on economies and markets? Indicatively, when Firstpost recently featured a commentary setting a 60,000 target for the Sensex in a few years, readers were, to go by their comments, overwhelmingly skeptical.

Hard-won reputation

Well, for a start, even Roubini’s reputation as a Doomsayer who gets it right was hard earned. As far back as 2003, Roubini, then relatively little-known, had been warning of a “nightmare hard-landing scenario” for the US economy, with its origins in a housing bubble. When that bubble bursts, he prophesied, its effect would spread to other areas of the financial system and the economy - and be transmitted around the world.

Roubini based his predictions on US macroeconomic specifics - principally, mounting current-account deficits and an excessively loose monetary policy that gave rise to asset bubbles. But nobody took him seriously.

Even up until 2006, Roubini was dismissed by his professional peers as a cuckoo and a loony scaremonger, much like the doomsayer who stands around at streetcorners prophesying the end of the world.

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But the meltdown of the US sub-prime housing market did happen exactly as he’d predicted, although it didn’t stick to the timeline he’d laid out. The spillover effect of that housing crisis on financial institutions in the US and on the global economy too proved amazingly prescient.

Roubini himself suggests sportingly that he owes much to the research of other economists and commentators.

In his opinion ,“The worst financial and economic crisis since the Great Depression was not a ‘Black Swan’ event but rather a ‘White Swan’. In other words, it was not a random drawing from a distribution of events with a fat tail but actually predictable in advance given the rising macro and financial risks and vulnerabilities.

“There were many economists and analysts who actually predicted, early on, many risks and vulnerabilities that would have led to a crisis. In many ways, I simply connected the dots in these different strands of thinking and warnings.”

Even after the US slid into recession, while others were comforting themselves with hopes of a snapback recovery, Roubini remained sceptical. In May 2008, months before the collapse of Lehman Brothers, when the markets were discounting the possibility of a deep recession, he told me that the “worse is still ahead of us.”

Months later, the nearest thing to a financial apocalypse rattled the world, which is still to recover from that shock.

Bearish on Roubini

Yet, for all of Roubini’s right-on-the-money calls, there’s a thriving cottage industry dedicated to establishing that his success in fact overstated.

This commentator says : “Roubini predicted a recession in 2004, 2005, 2006, and 2007. He was wrong four years in a row. So, in 2008, his prediction appears to be finally coming true. Well, a stopped clock is correct twice each day.”

An assistant editor of The Daily Telegraph too faulted Roubini’s calls on the economy and on the financial markets, and said that his right call on the 2008 crisis was proof that “if you say something consistently enough for long enough, eventually you will be proved right.” (You only have to look at the economic data for the UK cited in the Daily Telegraph article to know that in fact, Roubini was proved right yet again.)

More recently, a CNBC commentator vehemently disagreed with Roubini’s claim that China would experience a hard landing of its economy in 2013.

“Roubini is wrong about China because he surprisingly misunderstands basic trends on income, demographics, and investment there,” the commentary noted.

Such criticism isn’t restricted to Roubini; other Doomsayers too have come in for criticism, although the core of the Doomsday argument has been by and large right to an astonishing degree, even if the timelines were a little off.

Just last month, a WSJ commentator made bold to explain “ why the doomsayers are wrong .” Ironically, the numbers he cites in his defence are already demolishing his argument.

Fundamentals vs timing

One of the problems with economic prophesying by Doomsayers is that while they may get the fundamental research right and arrive at a correct diagnosis, it isn’t always possible to predict the crisis timeline exactly right. Policy interventions may delay the inevitable, but in the end the laws of economics catch up with artificial reality.

The global economy would have been vastly better today if policymakers had paid heed to credible Doomsayers like Roubini back when he hadn’t quite become the “ rock star among geeks, wonks and nerds .“Who knows what economic perils lie in store ahead of us because even today, we’re dissecting the credibility of the Doomsayer rather than heeding his downbeat message…