Roubini, Bremmer and the Fed policy that’s going to implode

Famed economist Nouriel Roubini and president of Eurasia Group Ian Bremmer launched into Institutional Investor assault on all that's going wrong with the global economy right now and new crises are most certainly headed our way. They call it a "G-Zero world," referring to leadership void where its every nation for itself.

Barbara Kollmeyer
June 18, 2013, 7:47 AM
Market Watch

“Be sure your seatbelt is fastened, because nothing has really come to rest. We have entered the New Abnormal, a period in which every market assumption must be questioned and the wise investor is prepared to be surprised.”

And that’s how famed economist Nouriel Roubini and Ian Bremmer, the president of Eurasia Group, launch into an eight-screen Institutional Investor assault on all that’s going wrong with the global economy right now and on how new crises are most certainly headed our way.

Calling it the G-Zero world — referring to a leadership void where it’s every nation for itself — the two pepper the essay with warnings about China growth, another Europe meltdown or turmoil in the Middle East, a region they definitely see as not OK. Oh, and forget about the BRICS bailing out global growth.

Fast-fowarding past all that, central banks, mostly the Fed, get the last salvo from the doomsday duo, who devote several paragraphs largely to how that easy money policy is going to land us all in trouble. What markets and economist are hoping for as that two-day Fed meeting kicks off Tuesday is a slow and steady easy out of QE. That’ll fix everything, right? Wrong:

“…a slow exit risks creating a credit and asset bubble as large as the previous one, if not larger. Pursuing real economic stability, it seems, may again lead to financial instability. Thus the exit from the Fed’s QE and zero-interest-rate policies will be treacherous: Exiting too fast will crash the real economy, while exiting too slowly will first create a huge bubble and then crash the financial system.”

And when it comes time to tighten up, officials should expect even more chaos. In the last cycle, which began in 2004, the Fed took around two years to normalize policy, and that was against a backdrop of lower debt and unemployment.

“But if financial markets are already frothy, consider how frothy they will be when the Fed starts tightening — and then when the Fed finishes tightening. From 2001 to 2004 interest rates were too low for too long, and the subsequent rate normalization was too slow, inflation huge bubbles in credit, housing and equity markets.”

What liquidity injections have done, Roubini and Bremmer argue, is just boost leverage and risk-taking in financial markets.

“It may be too soon to say that many risky assets have reached bubble levels and that leverage and risk-taking in financial markets is becoming excessive, but the reality is that credit and equity bubbles are likely to form in the next two years owing to ongoing loose U.S. monetary policy.”

Some on Twitter say that for all his gloom, Roubini may not be far off the mark:

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