Part 14 (2/2)
The recent crisis has made it clear that the ”Great Instability”era than the ”Great Moderation” asset bubbles and busts ht to occur only once or twice a century lobal economy far more often Black swans may become white swans
That would be unfortunate: as financial crises grow in frequency and severity, they will inflict social and political instability and ultilobalization The backlash could take many forms: protectionist trade policies; financial protectionisn direct investment; capital controls; and a broader rejection of any policies that promote free markets
How to prevent such a backlash? First, it's essential for governments to adopt policies that reduce the frequency and virulence of asset boo the financial syste the lines described earlier in this book But it will also require the construction of a overnh to switch jobs and careers frequently, they will need ly uncertain employreater invest; a safety net of unemployment benefits; and portable health care plans and pension benefits In the United States, it will also ressive tax system in order to pay for these benefits
Paradoxically,workers to be lobal economy where ”creative destruction” will be the norovernulation to keep boo It can provide a broad social safety net to help make workers more productive and flexible It can implement tax systems that will reduce inequalities of wealth and incoer role intheir economic policies so as not to create the kind of imbalances that produce crises in the first place Crises overnments can limit their incidence and severity
In the shadow of the worst financial meltdown since the Great Depression, many policy makers and pundits have observed that ”a crisis is a terrible thing to waste” This is true We will plant the seeds of an even more destructive crisis if we squander the opportunity this crisis has presented us to implement necessary reforic-thing to waste
ACKNOWLEDGMENTS
Speaking as one, ant to thank Ea editorial instincts have proven invaluable in getting two professors to write for an audience beyond the confines of academia Unflappable and whip s this book every step of the way Many thanks as well to the rest of the staff at Penguin: Janet Biehl, Bruce Giffords, Nicole Hughes, and last but not least, Ann Godoff We also want to extend our appreciation to those who read the manuscript with an eye toward clarification, especially Jane Cavolina, Dan Kaufoes to Wes Neff of the Leigh Bureau, who first proposed this project and brought us together with Eaments
I would like to thank atti, Arnab Das, Elisa Parisi-Capone, Rachel Zieado, Sandra Navidi, and ues for the last few years Parul Walia was helpful with a chronology of the crisis Brad Setser, a forue in many different venues and the coauthor ofboard for ideas
My colleagues at the Stern School of Business at New York University-starting with Richard Sylla, David Backus, Tom Cooley, Paul Wachtel, Matt Richardson, Viral Acharya, and others-provided or and opportunities for discussion and debate Acadehts on internationaloff, Carhu Rajan, Jeffrey Frankel, Richard Portes, Joe Stiglitz, Niall Ferguson, Robert shi+ller, Hyun shi+n, Barry Eichengreen, Willem Buiter, Simon Johnson, Bob Mundell, Joseph Mason, ram at the National Bureau of Economic Research, and roup at the Centre for Economic and Policy Research Giancarlo Corsetti, Paolo Pesenti, Bernardo Guimares, Paolo Manasse, Vittorio Grilli, and Fabrizio Perri have been a my coauthors of academic research on international macroeconomics and financial crises; I have learned much from them
Market practitioners, analysts, and other thinkers houe include Martin Wolf, Steve Roach, David Rosenberg, Mark Zandi, Ji, Lewis Alexander, Don Hanna, Stephen King, Manu kumar, Jens Nystedt, Robert Kahn, Chris Whalen, Joshua Rosner, Barry Ritholtz, Yves S Munchau, Gillian Tett, Ian Bremmer, Michael Pettis, Steve Drobny, Satyajit Das, Katerina Alexandraki, Daniel Alpert, Charles Morris, Richard Bookstaber, Edward Chancellor, and Walter Molano Former policy makers and other policy think-tank scholars hom I've interacted include Alex Pollock, Dessten, Morris Goldstein, Adaanizing policy conferences via his Reinventing Bretton Woods Committee
A nuues of mine while I worked at the Council of Econo 1998-2000-have shapedany of them in any way or form with my views, I want to thank Larry Summers, Tim Geithner, Stan Fischer, David Lipton, Mary Goodman, Anna Gelpern, Dan Tarullo, Janet Yellen, John Lipsky, Bill White, Olivier Blanchard, Federico Sturzenegger, Andres Velasco, Felipe Larrain, and Hans-Helreat deal about financial crises froues at the International Monetary Fund, where I have had e Soros kindly hosted me in his summer home while I wrote parts of this book and has always been for me a model of a ”Renaissance man” I also benefited from discussions with other investors interested in macroeconomics and economics policy issues, such as John Paulson, Louis Bacon, Bill Janeway, Ron Perelman, Steve Eisman, Daniel Loeb, Avi Tiomkin, Harry Lefrak, Stylianos Zavvos, Charles Krusen, and Jim Coleman My friend Shai Baitel also supported my intellectual ventures I thank Klaus Schwab and reat venue to present and discuss ers-some top-notch academic economists and many accomplished veterans of Wall Street-provided hts about the financial crisis These include Yves Smith of ”Naked Capitalism”; ”Calculated Risk,” hoey; the anony Reality with Both Hands”; Barry Ritholtz at ”The Big Picture”; Mark Thoma at ”Economan at ”The Conscience of a Liberal”; Mike Shedlock at ”Mish's Global Econoinal Revolution”; The Wall Street Journal's ”Real Ti and the other econo”; Dean Baker at ”Beat the Press”; Greg Mankiw on his blog; and many, many others who have played such an instru the financial crisis
Finally, I want to thankthe idea of a book and helping me develop this project
-Nouriel Roubini
I firsthiazine, and many of the ideas behind this book first surfaced in the course of that assignment I want to thank my editor there, Jamie Ryerson, as well as Alex Star, Gerald Marzorati, Adam Moss, and Jack Rosenthal, all of who my work at the Times Thanks as well to Steve Heuser at The Boston Globe for letting me air some of the ideas that ultiratitude to Henry Grunwald and Sarah Lewis, each of who ues at the University of Georgia deserve special acknowledg with the members of the Workshop in the Cultural History of Capitalism; Allan Kulikoff has been especially helpful in so rateful to Paul Sutter, Robert Pratt, and Garnett Stokes, who provided a course release so that I would have ues at the University of Georgia have provided moral support, constructive criticism, or simply a much-needed respite from work: Stephen Berry, Kathleen Clark, Jim Cobb, Rachel Gabara, Shane Hamilton, John Inscoe, Michael Kwass, Chana Kai Lee, Laura Mason, Bethany Moreton, Bob Pratt, Reinaldo Roe Selgin, Steve Soper, Paul Sutter, Paston Smith Thanks as well to those friends who put me up in New York City while I worked on this book, especially Michael Lacombe, as well as David Sampliner and Rachel Shuman
Several economists, policy makers, and individuals with hands-on experience in the financial markets have fielded endless queries from me David Dean, David Forquer, Michael Laskawy, Benjaht have all provided insights on various esoteric financial matters Finally, I owe a particular debt to Richard Sylla of New York University I have known dick since graduate school, and he has been an unfailing source of insight on the convergence of econoent, Tina Bennett, who has been an indispensable guide throughout this process from start to finish She and the staff at Janklow & Nesbit-including Svetlana Katz-deserve special thanks for representing hout this process A special thanks as well to Joyce Seltzer of Harvard University Press, who kindly gave me leave from another project so that I could coratitude for those who have helped out on the honificantly toward child care; Kathy Mih care of the kids during one particularly stressful weekend; so too didand my in-laws, Kathleen and Jamie Reason Likewise, Sheridan SCui and Mary Elizabeth Nuttall have also lent a hand at critical junctures So too did Martha Clinkscales and her fa out at a particularly critical time
Last, but certainly not least, I want to thank my fa support throughout the process of writing the book: her patience, advice, and love have kept oes to my three sons: Silas, Asher, and Linus They have provided comic relief as well as a constant relobal financial system demands my attention, it cannot compete with the more mundane-but more readily remedied-crises of dirty diapers, empty baby bottles, and bad dreams
-Stephen Mihm
NOTES
Introduction
1 ”nobody anywhere was sh”: dick Cheney, interview by Deb Riechmann, associated Press, January 8, 2009
1 the most famous prediction: Nouriel Roubini, lecture and discussion, International Monetary Fund, Washi+ngton, DC, September 7, 2006, transcript
2 elaborated on his pessi Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster,” February 5, 2008, online at roubinicom/analysis/44763php; Stephen Mihust 15, 2008
3 Robert shi+ller: Robert shi+ller, Irrational Exuberance (Princeton, NJ: Princeton University Press, 2000); Karl E Case and Robert J shi+ller, ”Is There a Bubble in the Housing Market?” Brookings Papers on Econohuram G Rajan, ”Has Financial Development Made the World Riskier?” speech delivered at Federal Reserve Bank of Kansas City symposium, ”The Greenspan Era: Lessons for the Future,” Jackson Hole, Wyo, August 27, 2005
3 ”the greatest of all credit bubbles”: Justin Lahart, ”NASDAQ: Five Years after the Peak,” Wall Street Journal, March 7, 2005
3 William White: Beat Balzli and Michaela Schiessl, ”The Man nobody Wanted to Hear,” Der Spiegel, July 8, 2009
3 Maurice Obstfeld and Kenneth Rogoff: Maurice Obstfeld and Kenneth Rogoff, ”The Unsustainable US Current Account Position Revisited,” National Bureau of Econo Paper no 10869, November 2004
3 Stephen Roach: Brett Arends, ”Econoeddon' Predicted,” Boston Herald, November 23, 2004
5 ”animal spirits”: John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, and World, 1936), 161
5 ”the ideas of economists”: Ibid, 383
11 ”The decadent international”: John Maynard Keynes, ”National Self-Sufficiency,” Yale Review 22 (1933): 760-61