Partying Like It's 2009

Apparently, it's not all doom & gloom for "Dr. Doom". Below are a few excerpts from Helaine Olen's profile of him in this month's Portfolio ("The Prime of Nouriel Roubini").

It’s Saturday night. A stream of young fashionistas and other assorted Manhattan scenesters pours into a fashionable Tribeca building. They’re all headed for the loft of a middle-aged economist—a man whose name would hardly have registered with anyone but the most obsessive CNBC watcher a few years ago. A doorman on duty surveys the scene and rolls his eyes. “Another Roubini party,” he mutters.

[...]

Bad times have certainly been good for Roubini’s social life. For years, he has been a manic host of everything from small dinner parties to big bashes. The soirees are more crowded of late, attracting everyone from members of the hedge-fund set to a former Miss Ukraine and propelling the bachelor economist onto the tabloid gossip pages. (He has become a New York Post regular, and CNBC often plays disco music when he appears on the air.)

Roubini’s partying side may have remained below the media radar but for his energetic use of Facebook. He kept his profile on the social-networking site open to the general public until a few months ago, something more privacy-minded users typically choose not to do. On his profile, he said he was single and interested in meeting women, and he posted photos of himself hamming it up with females who look two or three decades younger than he is.

[...]

“I’m a serious professional economist. I live in New York and have a social life,” Roubini says. “I have book parties and social dinners. And, you know, people will take pictures of you with your friends, and there are some attractive women. It doesn’t mean I go out with them. They’re my friends. I have nothing to hide.” When I send him a thank-you email, I can’t resist adding, “If you ask me, the deep mystery at the center of your life is why you would want to subject your apartment to that sort of abuse.” He quickly wrote back, “I do not subject my apt. to abuse. It is nice to have friends over, and I have a housekeeper that cleans up everything afterward.”

Still, Roubini can’t help himself: After [gossip website] Gawker cheekily noted that both he and dating columnist Julia Allison were going to attend the World Economic Forum in Davos, he made sure to be photographed with her there. Gawker’s dry comment: “Nouriel Roubini partying with intellectual peers.” Roubini’s response to me: “She’s a very smart cookie. Very smart. She can intelligently discuss lots of things.”

The photo above of Roubini and a few of his party guests accompanied the article in Portfolio.

Dealing with Deflation and Ameliorating a Recession, Part I

A number of columns have been written recently about dealing with the threat of deflation, including this one by Nouriel Roubini in today's Financial Times, "How to avoid the horrors of deflation". In that column, Roubini writes approvingly of the Fed's programs to purchase commercial paper, mortgage-backed paper and similar programs to increase liquidity and drive down borrowing costs for businesses and consumers.

With the bond market willing to lend the U.S. government funds at such low rates (e.g., 10-year Treasury yields at ~2.7%), why not take maximum advantage of that to stabilize asset prices and support aggregate demand? One fear is that, eventually, this orgy of borrowing will lead to a surge in inflation and interest rates when economic growth recovers, but it would seem that one way to ameliorate this would be to focus on buying assets rather than increasing outright spending.

For example, with many states facing budget shortfalls, instead of just giving money to the states, why not have the federal government buy a special class of 10-year municipal bonds from the states? The rate could be set at 50bps or 100bps over the U.S. government's current borrowing costs, which would still be a huge discount over the states' current borrowing costs in the municipal bond market. According to Bloomberg, yields on 10-year general obligation municipal bonds currently average 4.2%, so if these special municipal bonds sold to the federal government had a coupon rate 50bps higher than current 10-year Treasury yields (2.7%), they would still yield a full 100bps less than current 10-year municipal bond yields¹. The proceeds from these special municipal bonds sold to the federal government would enable the states to make payroll, fund already-scheduled local infrastructure projects, and -- if the federal government purchased a large enough order of these bonds (say, an amount equal to double each state's current budget shortfall) -- to call some of their callable municipal bonds, thus lowering their overall interest expenses and taking further pressure off state budgets.

According to the the Center on Budget and Policy Priorities, estimated shortfalls in state budgets for fiscal '09 total about $80 billion, so it would cost the federal government about $160 billion to buy an amount of special municipal bonds equal to double the states' estimated '09 budget shortfalls. Since these bonds would represent assets for the U.S. government, and the U.S. government would recoup its investment (with interest) in ten years, that ought to temper concerns about this expenditure's long-term impact on inflation and interest rates and assuage the Treasury market.


¹The coupon rates on the municipal bonds are of course what the states are actually paying in interest costs, but I'm using Bloomberg's yields as a proxy, for simplicity's sake.

"Dr. Doom"

Tomorrow's New York Times Magazine features an article by Stephen Mihm about NYU economist and author Nouriel Roubini, "Dr. Doom". On the real estate/mortgage bust, Roubini tells Mihm,

“You either nationalize the banks or you nationalize the mortgages,” he said. “Otherwise, they’re all toast.”

That seems a little hyperbolic. In a recent post ("America's Smartest Banker") we mentioned a few local banks that seem to have weathered the credit crunch fine, and are still making mortgage loans. Surely there are other local banks around the country that have been prudently run as well. In another recent post ("Profiting from the Credit Crunch/Real Estate Bust") we noted entrepreneurs in nearly opposite corners of the country making money by buying distressed mortgages. Why won't this sort of approach -- expanded as more seek profits in distressed mortgages -- eventually mop up most of the mortgage mess? Granted, when the dust settles, mortgages won't be as widely available as they were before to those with poor credit or those unable to make down payments, but a return to more rational lending standards will be a good thing for the financial system and the country as a whole.