DLaz: Hello everyone, I hope you have your favorite liquor in hand because we have a real treat tonight. My guests are Co-Presidents of the United States,
Nouriel Roubini and Paul
Krugman. Mr. Co-Presidents, it is a pleasure to have you on the show tonight.
Roubini: Call me Nouriel and the pleasure is all mine.
Krugman: And call me Paul. DLaz, we felt that it was our patriotic duty to come on the show. Your posts and shows have brought reason and tranquility in a time of so much uncertainty. The entire country owes you a debt of gratitude.
DLaz: Thank you. Gentlemen, lets get right to it. Looking back, it seems we could have easily avoided the decade of recession/depression experienced not just here, but throughout the world. Hindsight is 20/20, but you two were laying out the plan as far back as 2008-09 on how to deal with the economic crisis that is now, in 2017, finally subsiding. If any one's advice should have been heeded, surely it was yours, as your predictions of the forthcoming economic crisis seemed almost clairvoyant.
Nouriel, you were warning of the end of the real estate bubble as early as September 2006. Paul, a 2008 Nobel laureate, was critical of Alan Greenspan's reluctance to regulate the mortgage and financial markets as far back as 2005. Despite the great risk to your careers, you made these predictions, which, at the time, were met with ridicule and largely ignored.
However, by late 2008, early 2009, most of your predictions had come true. You two were hailed as prophets by some. Yet, in 2009, a crucial year in the management of the crisis, your advice was once again largely ignored. Looking back, how would you two describe the irrational behavior exhibited by the citizens and politicians of this country in ignoring your advice again?
Roubini: Well at the time, there was a lot of political pressure coming from both sides. The country was not yet ready to drown out the political noise and let the economists who best understood the crisis, handle it. It's just upsetting because so many jobs and trillions of dollars could have been saved.
Krugman: Morons! A bunch of idiots!
DLaz: We all know what happened next. The failure of the Obama administration to deal with the insolvent banks doomed any chance of the insufficient stimulus package from succeeding. As the economy continued to erode and with job losses mounting, Obama narrowly won re-election in 2012 by pledging to have you two run the Fed and the Treasury. From 2012-2016, you two tirelessly devoted your time to dragging the country and the world out of the Great Depression 2. In 2016, with your efforts gaining traction, popular sentiment pushed and passed an amendment to the constitution allowing for the one time election of Co-Presidents and foreign born citizens (Roubini). The 2016 election was more of a coronation, as you two ran unopposed, pledging to run for just one term, to safeguard the economy until it was on sound footing.
Once again, going back to 2009, Nouriel, can you please explain the first misstep our government took?
Roubini: Well the problems with the major banks of the US were not ones of illiquidity, but rather insolvency. Back then, I predicted total losses for the US banks and broker dealers would be about $1.8 trillion, whereas the total capital backing the bank's assets was only about $1.4 trillion, leaving the banks about $400 billion underwater. The right thing to do at the time would have been to nationalize the insolvent major banks, or if you will, put them temporarily in receivership.
DLaz: Of course, at the time, the word nationalization was a scary word, when actually; it was the most market friendly solution.
Roubini: Yes, you see, the government's decision to prop up the major banks only created zombie banks that couldn't effectively lend to the public because they were insolvent. Rather, the government needed to take temporary receivership of the big banks that were insolvent, which was most of the major banks, if not all of them by the end of 2009. At that point, we should have cleaned up their books and separated the good assets from the bad assets and quickly auctioned off the good assets to well-capitalized super regional banks and other private entities.
You could have done all this in months and quickly put the banks back in the hands of the private sector. Instead of 4 major zombie banks, we could have had about 30 major, well-capitalized banks that were healthy to lend and posed less systemic risk. In regards to the bad assets, you could have combined them all into one entity and liquidated the assets over many years, a la the RTC in the late 1980s.
DLaz: Wow, amazing. Now Paul, what other missteps did the government make in 2009?
Krugman: Well, as you alluded to before, the stimulus package was insufficient. In 2009, we were facing about a $2 trillion shortfall in GDP over the next two years. The 2009 plan was for $787 billion, of which $200 billion went towards tax cuts, which has little impact on demand, so only about $600 billion had an impact on the shortfall. Realistically, we needed a stimulus that would have added an additional $1.4 trillion in spending to the original plan.
DLaz: But Paul, as I remember, it was difficult enough passing the $787 billion stimulus due to the noise over the mushrooming budget deficit. How could you have convinced someone that we needed a $2 trillion stimulus when they were complaining about a $787 billion one?
Krugman: Do you know what got us out of the original Great Depression? World War II, which can basically be viewed as a large public works program. Spending for World War II led to full employment, and rising incomes with the private sector taking on very little of the debt. Over the course of the war, the government deficit had soared, but the ratio of private sector debt to GDP was cut in half. And this low level of private debt led to a quarter-century postwar boom, as the deficit was slowly paid down over the next few years.
Additionally, for a historical perspective on the public debt, after World War II, the public debt was about 120% of GDP. In 2008-09 it was only about 40% of GDP. In other words, we had more capacity to run up the public debt.
DLaz: And to think, if we just listened to those who had already proven that they had a supreme understanding of the economic crisis in 2009, we could have avoided years of misery. Well, we need to wrap this up, I have 3 time Oscar winner Megan Fox on next. But gentlemen, it would be my pleasure to buy you guys a drink. What can I get you?
Krugman: I'll take a Bass.
Roubini: Just a club soda for me.
DLaz: Nouriel....
Roubini: OK, I'll have Glenlivet on the rocks...make it a double.
Disclaimer: This is not a real interview with Krugman & Roubini. If you think it is, your an idiot and should immediately leave this blog.
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