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Roubini: “The crisis ripped the sleek shiny skin off what had become a gangrenous mess”

Laissez-Faire Economics, Nouriel Roubini | Roubini: “The crisis ripped the sleek shiny skin off what had become a gangrenous mess” Ian Fraser

The economist Nouriel Roubini is astonished that, even though the market-fundamentalist, laissez-faire belief system that dominated economic and political thinking for most of the past five decades is now utterly discredited, nothing has yet emerged to take its place.

In his new book, Crisis Economics: A Crash Course in the Future of Finance, co-authored by Stephen Mihm and published today by Penguin, Roubini argues that policymakers, bankers and economists allowed themselves to be seduced by "fairy tales about the wonders of unregulated markets and the limitless benefits of financial innovation.”

Given the banking and financial crisis has shown laissez-faire economics to be so wrong, Roubini, a former economic adviser to President Bill Clinton and a professor of economics at New York University’s Stern School of Business, is astonished nothing has yet emerged to replace it.

He said the absence of any fresh or alternative thinking about how to regulate and structure finance is evidenced by the timidity of reform proposals put forward by governments in the US, Europe, and elsewhere.

“Many countries have shown a remarkable reluctance to inaugurate the sort of wholesale reform necessary to bring the financial system to heel. Instead, people talk of tinkering with the financial system, as if what just happened was caused by a few bad mortgages.”

Roubini, who is seeking to help fill the intellectual void with his new book, also rubbished myth-making from the likes of embattled Lloyd Blankfein, Goldman Sachs boss, who has repeatedly claimed that the banking and financial crisis of 2007–10 was caused by a “100-year storm.”

He also rubbished the thesis of finance's philosopher king, Nassim Nicholas Taleb, author of The Black Swan: The Impact of the Highly Improbable. Roubini says that an asset price bubble is always accompanied by excessive risk taking and inevitably followed by financial collapse. “Boom and bust are predictable white swan events, not unpredictable and random black swans.”

The Turkish-born economist, who is also the founder of Roubini Global Economics, reminds readers that the banking and financial crisis was 100% man-made. It was the outcome of, among other things, fatally flawed assumptions at a macro and institutional level, warped pay structures in Wall Street, and the City of London firms and corrupt ratings agencies who would slap a AAA rating even on toxic waste so long as they were paid high enough fees.

Roubini argues that the global financial system basically rotted from the inside out—not from the outside in as people like Blankfein would have us believe. In a wonderful turn of phrase Roubini wrote: “The financial crisis merely ripped the sleek and shiny skin off what had become, over the years, a gangrenous mess.”

In my next blog post I will summarize some of the deep-seated cures Professor Roubini is proposing to eliminate the gangrene. The above quotes come from an exclusive extract published in the Daily Telegraph.

Further reading on banking regulation and laissez-faire economics

Tags: asset price bubbles , banking , business ethics , credit rating agencies , derivatives , Nouriel Roubini , regulation
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