In September 2006, Nouriel Roubini told an International Monetary Fund meeting that the US was in for a “once-in-a lifetime housing bust and a deep recession”, says Stephen Mihm in The New York Times. With mortgage-backed securities crashing worldwide, the global financial system would come to a “shuddering” halt.
Nobody paid much attention to the New York University economics professor back then. But within a couple of years he was a household name. Throw in other pessimistic soundbites and an “aura of gloom”, as Mihm puts it, and you can see why he’s known as ‘Dr Doom’.
Yet Dr Doom, unlike many pundits, is not worried about China. Pessimism about the Middle Kingdom’s recent stockmarket collapse is “excessive, unreasonable and irrational”, he told The Daily Telegraph’s Ambrose Evans-Pritchard last week.
Markets have swung from complacency about China to undue alarmism. Everyone thought the economy was humming along, then suddenly there was talk of growth slowing to 3%, or even 0%. But neither extreme is right. “The slowdown in China is neither a hard landing nor a soft landing – it’s a bumpy landing.
It could be better managed, but growth is not likely to be worse than 6.5% this year and 6% next year.” The stockmarket has scant impact on the economy, while the state stands behind the banks and can avert a financial sector meltdown. People have “misinterpreted” the liberalisation of the yuan’s exchange-rate regime as the beginning of a devaluation that could spread deflation across the world.
The global economy does look fragile, reckons Roubini, although it bodes well that the developed world’s fiscal policies are loosening. The lack of liquidity in bond markets has become the biggest worry for him in recent months. “As more investors pile into overvalued, increasingly illiquid assets – such as bonds – the risk of a long-term crash increases.”