To Avoid a Double Dip, Ignore Nouriel Roubini

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Economist of
the moment Nouriel Roubini continues to profit from the attention
that has resulted from his alleged prediction of the 2008 financial
crisis. The problem for Roubini is that if looked at objectively,
the ’08 crisis wasn’t financial, and his prediction simple luck.

It was luck
given the basic truth that no one, including Roubini, could have
predicted the global government response that truly authored the
crack-up. Contrary to his view that the moderation of housing was
the crisis, the greater, historically accurate reality is that the
global rush to housing driven by weakening currencies around the
world was the recession. And when the markets started to
correct classical Austrian malinvestment whereby limited capital
flowed into the proverbial ground, the global economy began to heal;
its rebound thwarted by government intervention.

But the crisis
itself was the intervention. Far from financial, it was a government
creation (something Roubini never forecasted) thanks to gargantuan
mistakes being bailed out which disallowed the natural cleansing
of the financial system. Short sellers were subsequently abolished,
thus removing downside protection from the markets, and then worst
of all, investors had to price in a future of muscular government
involvement in the global economy despite the obvious fruits wrought
by economic liberalization over the previous thirty years.

Roubini predicted
none of this. Instead, he remarkably called for a stimulus package
triple the size of the one President Obama foisted on the economy,
and then later on told the Wall Street Journal that U.S.
banks should be nationalized. Not only was Roubini’s ill-gotten
reputation made by the very government intrusion that he advocated,
his post-crisis musings, if implemented, would have made a bad problem
much worse.

Apparently
unwilling to go gently into the night, Roubini continues to dine
out on status that’s been falsely elevated by something he didn’t
predict. Just last week he penned a widely read essay on how the
global economy can avoid a double dip. Here’s hoping he’s ignored,
unless of course we want further economic hardship.

Roubini’s general
contention is that if governments "take away the monetary and
fiscal stimulus too soon – when private demand remains shaky – there
is a risk of falling back into recession and deflation." Rarely
has a mere portion of a sentence been so pregnant with falsehoods
and misunderstandings.

First off,
there’s no such thing as fiscal stimulus of the spending kind. Though
it’s well known at this point, governments can only spend money
they’ve first taken from the private sector. In short, governments
can at best merely steal demand from certain economic sectors in
order to fund generalized waste and a bigger state. There’s no economic
growth to speak of here.

Secondly, it
bears mentioning once again that no act of saving ever detracts
from demand. Roubini’s suggestion that governments must spend when
individuals don’t defies basic economics. Indeed, short of stuffing
dollars/pounds/euros/yen/yuan under mattresses, when individuals
save, their funds are either shifted to others with immediate consumptive
needs, or lent to businesses eager to grow.

Considering
loans to businesses that result from reduced consumption, everything
we have today is the result of past saving. Entrepreneurs can’t
innovate without free capital, and as such, we have Apple, FedEx
and Wal-Mart today thanks to the past willingness among individuals
to forego consumption in favor of saving. If Roubini’s logic is
applied here, governments would confiscate limited capital in order
to fund government growth.

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the rest of the article

June
24, 2010

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