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It’s
hard to forget your first Nouriel Roubini experience.
Fifteen
months ago, I watched an Asian Development Bank audience
in Kyoto squirm and fidget as the chairman of Roubini
Global Economics LLC gave his bleak, contrarian opinion
that the global financial system was about to hit a
wall.
“After
listening to you, I feel like I need a drink or a hug or
something,” I joked to him afterward. Roubini gets a lot
of such quips, and as his direst predictions about a
once-in-a-lifetime bust in the US economy come ever
closer to reality, I find myself hoping he’ll be proven
wrong.
Hats off
to Roubini. How many times in the past year did we hear
people say “this credit crisis is containable” or “the
worst is over” or “subprime-loan problems won’t spread
to other asset classes,” and the like?
Roubini
didn’t waver, and he took considerable flak for it.
That
said, Asia had better hope Roubini’s economic fears are
proven wrong. Ditto for the gloomy predictions of
Oppenheimer & Co. analyst Meredith Whitney, who recently
was toasted on the cover of Fortune magazine.
Perhaps
the magazine-cover curse will kick in and the attention
being tossed at Roubini, profiled last week by the New
York Times, and Whitney means the worst really is over.
Of course, they might say it’s just a matter of public
perception catching up with reality—a financial system
in tatters.
Subprime
system
One
reason to think Roubini won’t be proven wrong is his
argument that the problem isn’t the subprime-mortgage
market—it’s a subprime US financial system. Fixing the
problems sending financial contagion around the globe
will require tough decisions in Washington and reforms
in Wall Street’s securitization system. And that’s
hardly happening.
How far
Wall Street’s reputation has fallen since the collapse
of Bear Stearns Cos. was revealed by the Aiful Corp.
saga. Japan’s biggest consumer lender by assets
threatened to sue Lehman Brothers Holdings Inc. in June
after analyst Walter Altherr called Aiful “arguably
insolvent” in a report.
Lehman
retracted the report earlier this month, yet not before
Japan’s investment community had a good chuckle. The
fourth-largest US securities firm, with a share price
down 79 percent this year, calling another institution
shaky? Talk about the proverbial pot calling the kettle
black.
‘Muddle
along’
Even the
best-case scenario for Asia looks gloomy. As analysts
like Mark Matthews of Merrill Lynch & Co. in Hong Kong
point out, the next few years will see Asia-Pacific
markets excluding Japan “muddle along.” Wasn’t it just a
year ago that investors were claiming Asia had decoupled
from the US economy?
The
reasons Asia should hope Roubini eats some crow are
many.
For one,
the region remains too reliant on exports. While Asia
made some progress boosting domestic demand, slowing US
growth will chip away at living standards from Seoul to
Jakarta. For another, emerging markets may slide further
if global investors become even more risk adverse.
Mark
Mobius, executive chairman of Templeton Asset
Management, may indeed be right to call the decline in
emerging-market stocks “overdone.” Still, a deep
recession in the world’s biggest economy could
accelerate those losses.
Asia central banks amassed trillions of dollars of currency
reserves in recent years, a move that won’t seem
illogical if Roubini is proved correct. That cash will
be needed to provide insurance to global investors that
the region won’t see a repeat of its 1997 crisis.
US contagion
A decade
ago, Asia was exporting financial contagion potent
enough to send the Dow Jones Industrial Average down
hundreds of points here and there. These days, the US is
returning the favor, just as Diwa Guinigundo, deputy
governor of the Philippine central bank, predicted to me
a year ago. Hats off to Guinigundo; he was absolutely
right.
Where do
we stand now? “One year later, in the US the lack of
improvement in the money markets is still taking center
stage,” Roubini said yesterday. And the Federal Reserve,
on top of cutting its benchmark interest rate 325 basis
points, continues to expand its liquidity facilities
“without significant impact on credit creation.”
That’s
affecting emerging markets. For example, Roubini said,
“The global credit crisis has exacerbated home-grown
liquidity squeezes in countries like South Korea.”
The
question is how Asia would weather further weakness in
the US. China’s boom has provided some cushion, yet
officials in Beijing are busily working to tame
inflation. It also would be a mistake to think a US
recession won’t slam China.
So
here’s to Roubini for having a good couple of years of
economic prognosticating. And here’s to hoping he’ll be
less right in the future. Asia’s prosperity may depend
on it. |
