Did Roubini Get It Right?

by Don Boudreaux on March 21, 2009

in Fooled by Randomness

Here's a letter that I sent several days ago to the Washington Post:

In
your "Conversation With Nassim Nicholas Taleb" (March 15), Mr. Taleb
rightly warns against taking seriously any specific macroeconomic
predictions made by economists.  But I'm surprised that Mr. Taleb
identifies Nouriel Roubini as an exception to this rule – as an
economist who "got it right" when it came to predicting today's
economic downturn.

Roubini has predicted economic Armageddon for
years now, so he did not accurately predict the timing of this downturn
unless you regard incessantly screaming "we're doomed" to be an
accurate prediction.  And he got important details wrong.  For example,
as recently as 2005 Roubini warned that the "hard landing" would occur
because foreign holders of dollar-denominated assets would start to
diversify out of these assets, leading (in his words) "to a sharp fall
in the value of the U.S. dollar [and] significantly higher U.S.
long-term interest rates."* None of these things has happened.

Sincerely,
Donald J. Boudreaux

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{ 24 comments }

Gil March 21, 2009 at 8:41 am

An interesting contrarian piece. I've read about similar claims that someone "predicted the downturn for years" as if they were pyschic when in reality that someone was just a pessimist.

Don Boudreaux March 21, 2009 at 8:50 am

Gil,

Indeed. Lots of persons influenced by Austrian economics have been predicting a major depression since (literally) for as long as I can professionally remember — that is, since the late 1970s. They thought that the early 1980s downturn was it. Nope, turns out that it wasn't. Then the tech-bubble burst. Not that either. This time???

Adam March 21, 2009 at 9:55 am

Someone else made it up, and not me, but it still makes sense: He predicted 10 of the last 1 depressions, he must be right.

Adam March 21, 2009 at 9:56 am

My father-in-law has been like this since I knew him, 12 years now. He's predicted a stock market crash every year since then. It doesn't actually mean that he's right now.

Sam Grove March 21, 2009 at 12:27 pm

Lots of persons influenced by Austrian economics have been predicting a major depression since (literally) for as long as I can professionally remember — that is, since the late 1970s. They thought that the early 1980s downturn was it. Nope, turns out that it wasn't. Then the tech-bubble burst. Not that either. This time???

Perhaps they neglected to add the contingency; depending on what the government does and on how the market responds.

I don't know of anyone that can get the timing down, there are too many contingencies.

How much spending can we sustain?
How does Martin's demographic curve factor in?
Did the rise in fuel prices prick the bubble?
How long can we hold the empire together?

We shall see.

TrUmPiT March 21, 2009 at 1:18 pm

I've always accepted the premise that Nassim Nicholas Taleb and Alan Greenspan and others are loudmouthed and inscrutable charlatans respectively. It's the ones who are deified and are in positions of tremendous power like Greenspan that do the most harm, of course. The pop star, groupie attitude of most people really appalls me. Most people thoroughly appall me. Greenspan is ugly to boot so I really didn't understand the mass appeal. Hitler was ugly as well, so I guess physical beauty has nothing to do with the magnetism. The fact that there was no hue and cry on this blog regarding Bush's tax cuts mean that you guys appall me as well. There is enough appalling behaviour and lack of insight to sicken and disgust the most impassive, apathetic among us. I, for one, am throughly inconsolable, inchoate, and inconsequential. I'm darn mad, too!

Sam Grove March 21, 2009 at 1:27 pm

Greenspan is ugly to boot so I really didn't understand the mass appeal.

I have read that H Kissinger said that "political power is the greatest aphrodisiac of all."

Regarding tax cuts. Tax cuts are meaningless, what matters is government spending.

The cost of government spending will always be borne by those who labor to create value.

Bob Newhart March 21, 2009 at 1:43 pm

Jealous and bitter, are we?

Don, you're just jealous of Nouriel Roubini's fame and success. You're bitter because you spend all your time writing letters to complain.

Ray G March 21, 2009 at 2:47 pm

As hominem Mr. Newhart? Surely someone as petty and jealous as you say Mr. Boudreaux to be would be easy to refute on the merits of the topic alone.

Anyway, Roubini is the broken clock of economics. Eventually of course he'll be "correct" if only for a season.

When I was a financial advisor, people would ask me why they should expect anything good out of the market. My basic answer is of course that an economy is nothing more than a group of people who all want to do better tomorrow than they did today. Thus the natural direction for any economy is up. The only thing that brings an economy down are temporary corrections, and outside forces that act unnaturally to keep people from doing better tomorrow than they did today.

With the current trend of government of course, this may actually be happening, but Roubini's argument is still a broken clock. He's not predicting a socialist state per se, but he has been – as far I've read anyway – focused on singular predictions that aren't necessarily true.

So Taleb and others simply take his overall message as correct since regardless of why, the market has tanked hard.

vikingvista March 21, 2009 at 3:18 pm

The reason Roubini was wrong on that latest prediction is probably just because all of the other major economies have governments at least as bad as ours. The dollar will be devalued, but maybe not as much as other currencies.

And those hedging against this by buying gold need to remember what FDR did to gold owners during the Great Depression. And notice that even now Congress is very enthusiastic about shredding the Constitution to deflect the mob with their "bonuses" scapegoat.

No investment is safe with this cabal. Instead of finding a safe place to invest, those concerned about financial Armageddon should instead be looking for a safe place to run and hide.

RickC March 21, 2009 at 4:36 pm

The reason we keep chugging along is because the market has been very, very resilient despite all the government meddling. Millions of individual actors out there have been creative and motivated to find a way to succeed despite government's attempts to hamper or impede their efforts. That's the answer.

You have to ask yourself though, how much more can it take?

Doug Stevens March 21, 2009 at 6:01 pm

If I'm walking down the street with a friend and see a clown blowing up a balloon with no intention of stopping, I can confidently say that the balloon will pop. Let's say we stop and watch the clown for several minutes. Every ten seconds I repeat my belief that the balloon will pop. Does this constitute "incessantly screaming"? I can't say exactly when it will pop or which part of the balloon will be the first to fail. Does my inability to see these exact details mean that my prediction was not accurate?

Paris March 21, 2009 at 7:52 pm

OK, so now I will go on the record with a prediction. Some time in the next 30 years we will have another significant recession. Then I will go on the talk show circuit.

vidyohs March 21, 2009 at 10:01 pm

"Does my inability to see these exact details mean that my prediction was not accurate?
Posted by: Doug Stevens | Mar 21, 2009 6:01:20 PM"

Yes, if you attach a time frame to the "every ten second" prediction; and, that time frame fails to produce the results you predicted.

Then you're not predicting you're just guessing.

I too have been seeing these "diaster this year" predictions like clock work for well over thirty years, and they never happened.

I believe that Sir Roubini was/is one of those who attached time frames to his incessant screaming.

Euler March 21, 2009 at 11:01 pm

I'm not sure how you can consider Taleb to be a charlatan. Everything he has been saying for the last 5 years about financial models understating risk and being vulnerable to rare events has been proven correct, and he has made a huge fortune for himself and those who trusted him with their money by betting on the collapse of the financial sector.

Kevin March 21, 2009 at 11:22 pm

Roubini has been spinning narratives for years, and now one of them fits. He'll be the darling of people who think it is possible to know the future until he's wrong and someone else is right, and then that guy will be the darling.

Of course, no one does or can know the future. Taleb has made a fortune explaining to people that they can't know or understand what no one can know or understand. Now that's a salesman.

Ray G March 22, 2009 at 12:40 am

Doug:

If the guy making predictions about the exploding balloon gives erroneous reasons every ten seconds then yes, he's still "incessantly screaming"

Given the predictability of the business cycle, such a prognosticator can plan on a little good publicity every 8 to 10 years. If I were such a person, I'd start a new book somewhere around the 7th or 8th year after each recession. It'd be the same book with some minor details changed to reflect the most recent economic history.

Crusader March 22, 2009 at 3:34 am

Trumpit spewed:

The fact that there was no hue and cry on this blog regarding Bush's tax cuts mean that you guys appall me as well.

Well it's you folks on the other side of the aisle that appall me with your endless drive to socialize the economy and reward parasitism. There is nothing wrong with the tax cuts.

Matt March 22, 2009 at 8:24 am

100% agree Roubini is a stopped clock- he'll eventually be right. (Much like the touts that prop up bubbles.)

The only thing that troubles me is when you say, "None of these things has happened." I'd add "yet."

TrUmPiT March 22, 2009 at 11:04 am

There is nothing wrong with the (Bush's) tax cuts. – Crass Crusader

Your own admission taints and discredits you more than I ever could. Your pro-rich policies sicken and appall me, too. I'm sure that you will smugly appreciate that a fair share of the "stimulus" money is being spent on the rich won't don't need no damn stimulus: http://www.nytimes.com/2009/03/22/education/22schools.html?hp

What do you look like so I can mass produce voodoo dolls in your likeness?

vc March 22, 2009 at 11:29 am

Don,

I haven't been to Cafe Hayek in some time and this was the first article that caught my attention today.

I want to thank you for promptly reminding me why I haven't been here in over a year.

Sam Grove March 22, 2009 at 11:49 am

Next time, remember.

Trumpit, crusader is here as your rhetorical mirror.

Jeff Harding March 23, 2009 at 12:58 am

Interesting comment. Roubini, as I understand it, attended the Mises Institute. So he has some understanding of Austrian theory. He espouses Keynesian solutions to the problem. He gets a lot of press for being "right" which for an economist means he's making a lot of money right now. I agree with Sam G. that things change and what the government does is the key. It's pretty obvious that Roubini didn't buy into Hayek's ideas about epistemology.

Taleb is something else. He put his money where his mouth was and it paid off. He made sophisticated bets which had little downside risk at the time. Smart boy. I think he's on to something. Maybe he was just being polite in his reference to Roubini. But I've listened to him quite a bit and it seems like he understands the issues, but I don't know if he has Austrian leanings.

I have noticed over the years that many libertarians, especially when they first get into the ideas, have a doomsday outlook. Whether they are attracted to opposition philosophies because of the truth they seek or it matches their negative outlook, I don't know.

John March 23, 2009 at 9:33 am

TrUmPiT,
Just curious, do you have any thoughts or criticisms of any of the ideas presented here, or do you just attack the presenter?

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