Nuriel Roubini For Dr. Doom, a Crash Worthy of His Warnings

Nuriel Roubini

For Dr. Doom, a Crash Worthy of His Warnings
Daniel McGinn
NEWSWEEK
From the magazine issue dated Jan 5, 2009

With the economy in a tailspin and the layoff tally climbing, this is a tough time to be a second-year M.B.A. student who's about to hit the job market. It may be especially tough for the students who gathered in a second-floor classroom at New York University in early December to listen to a lecture on the global economy by their professor, Nouriel Roubini. To start the class, Roubini clicked an overhead screen to show the day's economic news. "The numbers are awful," he said, referring to the latest unemployment estimates. He clicked to another piece

of data. "That's as bad as you can get," he said grimly. For the next 90 minutes, Roubini—clad in a black suit, with tousled dark hair, fingering his reading glasses as he paced the front of the classroom—discussed his 15-point plan for rebuilding the global financial system. The M.B.A.s followed closely and challenged some of his points. Nothing he said should have made them optimistic, but that's hardly a surprise: there's a reason Roubini's nickname is Dr. Doom.

Roubini, who began making dire predictions about a U.S. economic collapse back when Americans were still busy flipping condos and doing cash-out refis, has become the oracle of the financial crisis. As early as mid-2006, on his well-read blog and in speeches, he explained why the bursting housing bubble would drive an unusually severe recession. He predicted mortgage defaults would cause financial institutions to fail, and that soaring oil prices, combined with falling home prices, would cause debt-ridden consumers to dramatically cut spending. At the time, most economists were predicting a "soft landing," and even those forecasting a housing downturn didn't foresee its deep impact on the financial system. Today Roubini scoffs at their optimism. "[My view] was so obvious, I don't know how anyone could argue otherwise," he says.

Roubini was born in Turkey to Iranian parents, but spent most of his early years in Italy. He came to America in 1983 to earn his Ph.D. at Harvard and never left. During the 1990s he taught economics at Yale and NYU, but he also dabbled in policy, spending summers at the International Monetary Fund, the Federal Reserve and the World Bank; for two years he worked alongside Larry Summers and Tim Geithner in the Clinton White House and Treasury Department. During that time he began closely studying the financial collapses in Mexico, Argentina and other developing economies, eventually coauthoring a seminal book on the topic. By the late 1990s, he'd begun posting his views on a blog that became a must-read for economy watchers.

Unlike economists who rely on complex math models to do their forecasting, Roubini operates more like a meteorologist, sifting through data, watching patterns and looking for similarities to past events. By 2004, Roubini was becoming alarmed by America's "twin deficits" as both the federal budget shortfall and trade imbalance grew wider. Despite its size, he wrote, the U.S. economy was starting to resemble an emerging market on the verge of collapse. In 2006, his pessimism shifted to the overinflated housing market as the catalyst for a U.S. downturn. During this time, he recalls taking a day off from a Las Vegas conference and driving out to the desert, passing mile after mile of newly built, unoccupied homes. "They were ghost towns," he says. "If this isn't a housing bubble that's going to pop, what is?" At the time, many mainstream economists disagreed with his calls. During a debate at the IMF in 2006, Anirvan Banerji of the Economic Cycle Research Institute derided his "subjective forecasting by selective analogy to past episodes that favor his bearish views." Even now, with much of the scenario Roubini spun out proving true, other observers point to inconsistencies. "He deserves a lot of credit for warning people early on about the possibility of a severe financial collapse," says Brookings Institution economist Martin Baily. "[But] I do not think the way the crisis has happened exactly fits what he says."

Roubini says he takes no pleasure from the current economic hardship. Still, he's not saying he'd prefer to have been wrong. "You're glad in the sense that, if you're intellectually honest, you're found out to be right, [even if] you don't go around and gloat," he says. Despite his prescience, he's suffered just like the rest of us: he's remained fully invested in stock index funds through the market downturn, causing his portfolio to plummet. And he has no expectation of a quick turnaround. He thinks the recession will last until the end of 2009, with the economy contracting a severe 4 or 5 percent, and unemployment peaking at above 9 percent in 2010. Stocks have further to fall, he says, suggesting the Dow could bottom out around 7,000. He's encouraged by the incoming Obama administration's talk of a big stimulus package, though, and expresses confidence that Summers and Geithner will prove aggressive recession fighters. And though critics may dismiss Roubini as permanently dour, he says that's not necessarily so. "Eventually, when we get out of this crisis, I'll be the first one to call the recovery," he says. "Then maybe I'll be called Dr. Boom." In his view, alas, that name change could be a long time coming.