Roubini’s Crisis Economics

Nouriel Roubini & Stephen Mihm Crisis Economics Penguin 2011

This gives a good overview of ideas about economics ands crises. But for Roubini Taleb’s ‘Black Swans’  are to be expected, and so better termed ‘White Swans’.

Roubini sees crises as the collapse of bubbles, forming inevitable cycles. The explanation for the bubbles and subsequent collapses are expressed in mainly psychological terms. Roubini thinks that the aim should be to protected ‘small people’ from the downside with reforms put in place so that the ‘guilty’ institutions are subject to Schumpeter’s ‘creative destruction’. He recommends monetary policy to achieve this., increasing interest rates.

[A]n almost religious faith in [mathematical] models helped create the conditions for the crisis in the first place, blinding traders and market players to the very real risks that had been accumulating for years. History promotes humility, a quality that comers in handy when assessing crises, which so often come on the heels of arrogant proclamations that ordinary economic rules no longer apply.

Comment

Roubini explains how inflation expands bubbles and their collapse leads to negative bubbles, which then – he seems to suppose – deflate leading to a reversion to the mean and subsequent inflation. But:

  1. Overall inflation, linked to interest rates, in which the value of everything stays the same ‘in real terms’ does not directly lead to bubbles. The culprit is ‘excessive inflation’, relative to overall inflation.
  2. There are psychological effects, by which people’s ‘feel good factor’ can increase when they are nominally, but really, better off. But it seems to me that the problems are not only psychological.
  3. In particular, I think that there has not been just a blind faith in misleading models, but a blind faith in the wrong type of models.
  4. Roubini argues that monetary policy is the best of the conventional means to regulate bubbles. He admits that this is crude, and does not consider any more radical alternatives.

In the UK, ‘borrow to let’ seemed to be contributing to the bubble. This might have been regulated more forensically, to everyone’s benefit.

See Also

Keynes.

My notes on economics.

Dave Marsay

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