Economist Henry Kaufman became famous in the 1970s as the bear with the dire view. Now he and his heirs warn that the financial crisis is far from over and that systemic risks threaten to spread from the markets to the geopolitical realm.
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by Suzanne McGeeOct 15 2010
Image: Portfolio.com; designed by Sean Driscoll
Henry Kaufman is far from upbeat about the outlook for the U.S. economy or the financial system.
That should come as anything but a shock to anyone familiar with Kaufman’s background as an economic pundit. After all, he earned the nickname “Dr. Doom” nearly four decades ago for his bearish outlook on interest rates and the bond market and for his fear that financial havoc might spread to the political environment and society as a whole.
Even as politicians and others try to take comfort from the passage of the package of financial reform measures known as the Dodd-Frank Act, Kaufman is reluctant to relinquish his pessimism …“It’s a very cumbersome piece of legislation and creates a tremendous amount of uncertainty,” the economist and financial consultant says. “Many aspects will take years to come into effect, and there are many issues that still have to be resolved by regulators in negotiation with the private sector.”
That, Kaufman says, means that the Dodd-Frank Act has at least two major flaws … In the short term, he argues, rather than accelerating the rate at which credit is created in the economy, the uncertainty means credit growth will actually slow. The longer-term problem is more acute, he says: The legislation doesn’t address the problem of financial institutions that become “too big to fail,” as the saying goes.
“Over a longer period of time, the result of Dodd-Frank will be to increase the size of the government’s role in the economy and in the financial system specifically,” Kaufman says. “Instead of adopting policies that help to downsize financial institutions, we are making this more like the European or Japanese system.” That, he argues, is not a good thing for the financial system or its users. …
Image via WikipediaBut while Kaufman may be the original “Dr. Doom,” these days he is just one figure in a pantheon of prophets of doom. Among his heirs are figures like Nouriel Roubini, a professor at New York University and head of his own economic-forecasting consulting firm, who was one of those who diagnosed the credit bubble and forecast that it would come to an early end. Since 2008, Roubini has warned repeatedly that the financial system and the economy haven’t yet emerged from the crisis and that an intractable public debt problem still looms.
While Roubini has emphasized sovereign-debt problems of the kind that became all too evident in Greece this year, others are trying to draw attention to a different source of concern: … It is the emergence of cash-rich and commodity-rich states as political powerhouses rivaling—and in some cases trumping—traditional geopolitical powers such as the European Union and the United States.
Cover via AmazonThat is the focus of two recent books, one by Ian Bremmer, president of the Eurasia Group (The End of the Free Market: Who Wins the War Between States and Corporations?), and the other by journalist Eric Weiner, entitled The Shadow Market: How a Group of Wealthy Nations and Powerful Investors Secretly Dominate the World.
As the titles imply, the next generation of prophets of doom are focusing on different sources of systemic risk than those that brought the financial system to the brink of disaster in 2008. Weiner, for instance, suggests that if the problems associated with the shadow financial system (all the mortgage originators and architects of structured products) were scary, the problems that could follow the evolution of a “shadow market” composed of countries that view their economic power as something to be deployed in their geopolitical interests could prove far more threatening to the U.S. financial system.
Weiner chooses some well-known examples to prove his point. Among them are China’s ability to use its importance as a source of liquidity in the global markets and as a large investor in U.S. government securities to win favorable treatment in some disputes and fend off criticism of its human-rights policies. … He envisages a secretive new financial world emerging, one in which transactions take place outside of the public arena and end up being hard for regulators or the public to monitor. …
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