I just read a very interesting and insightful interview with Nouriel Roubini ($), Economist and Professor at New York University, in this week’s Barron’s. Here’s a few excerpts for you:
Barron’s: Which banks, specifically, will fail?
Roubini: I don’t want to name names, but many, given the housing bust, will become insolvent.
Figures! They never give the really important details.
Talking about prevention of this crisis…
Barron’s: What should Bernanke have done a year ago, or even prior to that?
Roubini: The damage was done earlier, beginning when the Greenspan Fed lowered interest rates in 2001 after the bust of the technology bubble, and kept them too low for too long. They kept cutting the federal funds rate all the way to 1% through 2004, and then raised it gradually instead of quickly. This fed the credit and housing bubble.
Also, the Fed and other regulators took a reckless approach to regulating the financial sector. It was the laissez-faire approach of the Bush administration, and (tantamount to) self-regulation, which really means no regulation and a lack of market discipline. The banks’ and brokers’ risk-management models didn’t make sense because no one listens to the risk managers in good times. As Chuck Prince (the deposed CEO of Citigroup) said, ‘when the music plays you have to dance.’
“…no one listens to the risk managers in good times.” So true! Just like no one listened to the bears during the internet bubble.
Talking about what regulators are doing now…
Barron’s: Now the regulators are attempting to make up for lost time. What do you think of their efforts?
Roubini: The paradox is they’re going to the opposite pole. They are overregulating, bailing out troubled participants and intervening in every market. The Securities and Exchange Commission has accused others of trying to manipulate stocks, but the government itself is now the manipulator. The regulators should investigate themselves for bailing out Fannie Mae (FNM) and Freddie Mac (FRE), the creditors of Bear Stearns and the financial system with new lending facilities. They have swapped U.S. Treasury bonds for toxic securities. It is privatizing the gains and profits, and socializing the losses, as usual. This is socialism for Wall Street and the rich.
EXACTLY! I see the same thing with executive pay!
Barron’s: So the government should have let Bear Stearns fail, not to mention Fannie and Freddie?
Roubini: If you let Bear Stearns fail you can have a run on the entire banking system. But there are ways to manage Bear or Fannie and Freddie in a fairer way. If public money is to be put at stake, first all the shareholders of these companies have to be wiped out. Management has to be wiped out, and the creditors of Bear should have taken a hit. Why did the Fed buy $29 billion of the most toxic securities, and essentially bail out JPMorgan Chase (JPM), which bought Bear Stearns?
I like this guy.
The rest of the interview is just as interesting as the points I highlighted. I’m going to see if I can get Barron’s to make it publicly available.