He is simply known within market circles as Dr. Doom, since he precisely called the credit crisis and subsequent downturn in global financial markets. Today, Roubini is sharing the same concerns about asset bubbles as a result of continued low interest rates and the flood of capital pouring into equity markets and commodities. He is also not convinced about what many have defined as “V” shaped or sharp recovery.
But in my time with the economist, who is of Iranian decent and grew up in Istanbul, I decided to link our conversation to the key issues surrounding the region – notably the durability of the dollar as a reserve currency, Gulf monetary union, oil prices and Dubai’s debt crisis.
Roubini suggested that central bankers of the region look carefully at the European model when constructing the framework for Gulf monetary union saying, “One of the lessons is, monetary union can be successful if the member countries are relatively homogenous” and are prepared to set up a structure for burden sharing.
This has not been the case in Europe, where cracks in the convergence process were papered over and took a decade to emerge. That is what the Greek debt crisis is telling us today and wealthier states – notably Germany – have expressed displeasure at exactly the kind of burden-sharing Roubini is talking about.
As a result of the Greek crisis, Roubini believes the dollar’s role as the world’s reserve currency is not under threat.
“There is no clear alternative,” he said. “The Euro may not survive and the British pound is weak.” “Not survive?” I quickly responded. “It is a possibility … ” he said. “You could have weaker states of the Eurozone like Portugal or Greece eventually exit the union and that will weaken the Euro.”
Dollar weakness over the past year has been one contributing factor behind the rise of oil, with the region’s most precious commodity priced in the greenback. Nevertheless, the NYU economist does not feel that fundamentals are supporting the recent 18 month high of $87 a barrel.
“Part of it is this wall of liquidity chasing assets because of easy money,” said Roubini. As a result he believes “oil at $60 is justified, but oil at $80 I don’t think is justified.”
That demand concern was reflected in both OPEC’s monthly oil market report (which shows demand growth of just 1.1 percent from a low level in 2009) and the International Energy Agency, which talks similarly about tepid recovery in the industrialized world.
Dubai’s recovery after its own debt crisis drew parallels to the real estate bubble in America’s Sun Belt – in particular Florida, Arizona, Nevada and California.
Roubini called Dubai’s bubble unique because of the lack of clarity about what is a private or state-owned entity. The state feels “they have to takeover the liabilities and bail them out because the consequences of a disorderly collapse would be even more damaging.”
As a result, Roubini says Dubai sent out mixed signals by indicating initially that the state would not have a role, only to have neighboring Abu Dhabi step in on two separate occasions.
Dr .Doom bluntly said that may have established the wrong precedent, “If we keep on socializing all the private losses the build up of the debt implies that you have to raise taxes, cut spending or eventually even default.”
“A leading expert on crimes in high places”