The End of the Superpower

Nouiel Roubini, NYTIMES

Roubini began studying these countries and soon identified
what he saw as their common weaknesses. On the eve of the crises that befell
them, he noticed, most had huge current-account deficits (meaning, basically,
that they spent far more than they made), and they typically financed these
deficits by borrowing from abroad in ways that exposed them to the national
equivalent of bank runs. Most of these countries also had poorly regulated
banking systems plagued by excessive borrowing and reckless lending. Corporate
governance was often weak, with cronyism in abundance.

Econometric models typically rely on the assumption that the
near future is likely to be similar to the recent past, and thus it is rare
that the models anticipate breaks in the economy. And if the models can't
foresee a relatively minor break like a recession, they have even more trouble
modeling and predicting a major rupture like a full-blown financial crisis.
Only a handful of 20th-century economists have even bothered to study financial
panics. (The most notable example is probably the late economist Hyman Minksy,
of whom Roubini is an avid reader.) "These are things most economists
barely understand," Roubini told me. "We're in uncharted territory
where standard economic theory isn't helpful."

Roubini argues that the Fed's actions averted catastrophe,
though he says he believes that future bailouts should focus on mortgage
owners, not investors. Accordingly, he sees the choice facing the United States
as stark but simple: either the government backs up a trillion-plus dollars'
worth of high-risk mortgages (in exchange for the lenders' agreement to reduce
monthly mortgage payments), or the banks and other institutions holding those
mortgages -- or the complex securities derived from them -- go under. "You
either nationalize the banks or you nationalize the mortgages," he said.
"Otherwise, they're all toast."
But most important, in Roubini's opinion, is to realize that the problem is
deeper than the housing crisis. "Reckless people have deluded themselves
that this was a subprime crisis," he told me. "But we have problems
with credit-card debt, student-loan debt, auto loans, commercial real estate
loans, home-equity loans, corporate debt and loans that financed leveraged
buyouts." All of these forms of debt, he argues, suffer from some or all
of the same traits that first surfaced in the housing market: shoddy
underwriting, securitization, negligence on the part of the credit-rating
agencies and lax government oversight. "We have a subprime financial
system," he said, "not a subprime mortgage market."
Roubini argues that most of the losses from this bad debt have yet to be
written off, and the toll from bad commercial real estate loans alone may help
send hundreds of local banks into the arms of the Federal
Deposit Insurance Corporation. "A good third of the regional banks
won't make it," he predicted. In turn, these bailouts will add hundreds of
billions of dollars to an already gargantuan federal debt, and someone,
somewhere, is going to have to finance that debt, along with all the other debt
accumulated by consumers and corporations. "Our biggest financiers are China, Russia
and the gulf states,"
Roubini noted. "These are rivals, not allies."
The United States, Roubini went on, will likely muddle through the crisis
but will emerge from it a different nation, with a different place in the
world. "Once you run current-account deficits, you depend on the kindness
of strangers," he said, pausing to let out a resigned sigh. "This
might be the beginning of the end of the American empire."
© 2008 The New York Times