Seeing Crises Clearly
| Author | Prakash Loungani |
| Position | Advisor in the IMF's Research Department |
| Pages | 4-7 |
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The "Power 50"-that was what Institutional Investor called its 2009 list of the 50 most influential people in the financial world. Many of the names were those of top policymakers and CEOs such as Ben Bernanke and Warren Buffett. Only one professor of economics made the list: at number 44, one notch below Saudi investor Prince Alwaleed bin Talal, was Nouriel Roubini of New York University.
It is a satisfying turn of events for Roubini, who was drawn to economics for its potential to influence public opinion and policies. Two decades ago, Roubini was known primarily in academic circles for influential work on how political conditions affected economic outcomes. A decade ago, he was starting to make his name outside academia as a provider of information and analysis on the Asian financial crisis. Today, he is becoming a household name, lauded in the words of Institutional Investor for "predicting that a U.S. real estate crash would cause banking failures and a deep recession."
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He travels extensively these days to lecture about the effects of the crash he predicted. Ticking off a recent two-week itinerary-"Istanbul, Dubai, Abu Dhabi, London, Moscow"-he pauses: "I'm forgetting some place in between. What is it? Oh yes, Davos!"
Roubini calls himself a "global nomad." Of Iranian descent, and born in Istanbul, he grew up in Israel and Italy, receiving his bachelor's education at Bocconi University in Milan in the late 1970s. "There was a lot of social and political turmoil in Italy at this time. And many people like me, even in their teens, were socially conscious and cared about this.... Economics offered a way to understand the world and then, hopefully, through good policies, also change it for the better."
He had a role model in Mario Monti, an economics professor at Bocconi, who went on to become very influential in European policymaking circles (see F&D, June 2005, for a profile of Monti). The Yale-trained Monti was "a charismatic leader and teacher," says Roubini. "He was a serious academic but he cared about policy."
When it came time to pick graduate schools, Roubini faced the Cambridge vs. Cambridge choice that confronted many promising students. There was a tradition of Italian students going to the University of Cambridge in the United Kingdom, attracted by the presence there of the noted Italian economist Piero Sraffa. But by the 1980s, students were more likely to turn to Cambridge, Massachusetts, where another great Italian economist, Franco Modigliani, was ensconced at the Massachusetts Institute of Technology (MIT).
Roubini picked Cambridge, Mass., but went to Harvard rather than MIT. Why? "I didn't get into MIT," he says. "But please make it clear that I take no offense. These things happen." In fact, he got the benefits of interactions with both Harvard's superstars-"Jeff Sachs, Larry Summers, Robert Barro, and Greg Mankiw were around"-and MIT's. "I would attend classes [at MIT] by Rudi Dornbusch, Stan Fischer, and Olivier Blanchard," he says. His first job after graduating from Harvard in 1988 was at Yale.
Influenced by the saga of Italy's struggle with large and persistent budget deficits, Roubini was drawn to the study of fiscal policy-how governments decide how much to spend and how to pay for it. It was a time when governments were spending and not paying for it, at least not right away.
"It was quite striking," says Roubini. "In the 1970s and early 1980s, many countries in Europe had deficits of about 4 percent of GDP, and in some, such as Belgium, Greece, and Italy, deficits were as high as 10 percent of GDP." As a consequence, government debt increased significantly: the debt of the countries that would later make up the euro area "nearly doubled, from something like 30 percent to 60 percent" of their combined incomes. The United States and Japan also ran persistent deficits.
Two views prevailed in the academic arena of what gave rise to these government deficits and how much to worry about them. One view, put forward by Nobel Prize winner James Buchanan, was that...
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