Roubini: the crash was a "white swan"

Roubini has become quite the brand name, thanks to his great 2006 prediction of a global recession.  His web site goes way beyond the usual blog and book-hawking to providing "a uniquely tailored look at the logic of the global economy, applying the methodology of its renowned founder, NYU economist Nouriel Roubini"--replete with all sorts of analytical pieces by his employees.

What drew me to this interview:

What have we learned from these crises of capitalism?

The first lesson is that crises are not "black swan" events, using the terminology of my friend Nassim Taleb. They're not just random outcomes. They are the result of a buildup of financial and policy vulnerability and mistakes—excessive risk-taking, leverage, debt, and so on. The first chapter of my book is called "The White Swan" because these events are predictable. But generation after generation, we seem to forget the past. When there's a bubble, there's euphoria. There's irrational exuberance. Consumers can use their homes like ATM machines. Governments and policymakers are happy because they get reelected. Wall Street makes billions of dollars of profits. Everybody's delusional.

It was an old staple of mine in the NewRuleSets.Project brief to talk about rule-set resets happening every 7-10 years on Wall Street, primarily because it was a young man's game and once you got some distance from the last crash, all the new people, being somewhat ignorant of the causes, began to imagine they had invented some new way of perfecting their gaming of the market.  Over time, in their mounting hubris, they unwittingly or wittingly broke old taboos, saying it was different this time.  As those abuses accumulated and the self-delusion grew, the crash was inevitably triggered, and many--but not all--of the "new" rules were found not to have surpassed the old ones, even as the old ones now needed to be updated to account for the new behaviors engendered in the latest round of going just a bit too far.

I got this entire logic from my people at Cantor Fitzgerald.  They said it was as regular as a clock.

So, 2008, about 7-8 past the last financial meltdown known as the dot.com crash, was a pretty decent bet or prediction to make.  Don't be surprised when another one happens sometime in the middle of this decade.

Then again, it's different now, because now we have more than just the NYC-London financial axis in play. Now we've a number of significant markets, all of whom are going through their own learning-curve cycles with predictable crashes and reboots--or rule-set rests, as I call them.

So yeah, more white swan than black.

Comments

[Petrer]

I remember looking over Nouriel Roubini in school around December 2006...it was a presentation another student had in our intermediate macroecon course. Roubini is considered a "neo-Keynesian" or a blend of classical economics with Keynesian economics (basically lower taxes, deficit spending in the recession years, supposed to save in the growing years...ha...hence why we have pseudo Keynesians!!). The ironic part is that economists like Roubini concur with the out of mainstream Austrian school...The Austrians blame Keynes and state intervention, while people like Roubini blame people who call themselves "Keynesians" and don't even follow his prescription.

[Louis Heberlein]

It's been a few years since I taught. I used to start each management course with a 'LESSONS LEARNED' history background that showed what caused the management techniques to be established. The brightest students were the ones who found the info 'BORING.' But the visiting administrators were even more critical because it was not OLD STUFF rather than the new hot topics that would attract more students. And it was usually the NEW STUFF that got our students to be interviewed by businesses that had read very brief and simplified magazine articles about HOT NEW TOPICS.

Nothing new ... Adam Smith warned readers about those dumb trends.