What have been Treasury Secretary Timothy Geithner's best and worst decisions? What will be the next big financial crisis? Will gold prices continue to rise? Is the China real estate market headed for a crash? Is Lady Gaga overvalued? And what's it really like to be Dr. Doom? In this second part of our two articles, Motley Fool Money Radio Show host Chris Hill asks NYU professor Nouriel Roubini, co-author of Crisis Economics: A Crash Course in the Future of Finance.
Chris Hill: You've worked with Treasury Secretary Tim Geithner in the past. What do you think are the best and worst decisions he's made throughout this whole process?
Nouriel Roubini: I have to give him credit, like I did also to Bernanke. We risked another Great Depression and forceful action, monetary and fiscal easing, and backstopping the financial system avoided the free fall of the economy. So I think that, overall, he did the right thing, but I think the policy response has been biased toward bailing out too many financial institutions.
It started with Bear Stearns, it continued with AIG, and we have essentially kept alive too many zombie financial institutions. So, at the margin, I would have used less public money and I would have converted some of these unsustainable debts of the financial system into equity. When a firm goes into trouble, Chapter 11 allows you to reduce debt and convert some of that debt into equity. I think that's a more appropriate solution of a debt problem rather than putting those liabilities and toxic assets of the private sector on the balance sheet of the public sector, which eventually leads to the breaking of that public sector's balance sheet.
Hill: You're known as someone who is bearish in general. You've certainly made some great predictions, the one back in September 2006 was spot-on and done at a time where few, if any others, were saying that sort of thing. But in March of last year, you said we were having a bear market "suckers rally" and the Dow is up around 50% since that point. I guess my question is, is it easier to predict a crisis than it is to predict a recovery? If so, why is that?
Roubini: I would say the contrary, it's much harder to predict a crisis because crises don't occur very often and the timing of them is very hard. I would say, even about the stock market issue, throughout this crisis, there were about six different bear market rallies between essentially the fall of 2007 and March of 2009. Five times out of six, I say this is a bear market rally and I was right when 99% of the people said, "This is the beginning of the recovery." I admit I missed the rally that came after March. But I would say everybody else got it wrong, five times out of six. I got this wrong only once. So we have to put these kinds of things into perspective.
Hill: How do you invest your own money?
Roubini: Well, it's bifurcated. On one side, I believe in long-term passive investment and my 401(k) is into equity -- 50% U.S., 50% global indices passive, because I don't believe in active asset management. On the other side, however, for the last three years, every kind of extra dollar or savings I've made out of my income has gone into cash as I got out of the stock market in the middle of 2007.
Hill: Let's talk about Dr. Doom. I don't know of many economists who have nicknames, but you recently said you'd like to change your Dr. Doom nickname. Let me play devil's advocate, hasn't that been kind of good for your career?
Roubini: The nickname Dr. Doom is kind of cute, but I would like to point out that I'm not a permabear. There is a global economic recovery, however anemic. My business is important to be right, not just to be permanently either optimistic or pessimistic -- you have to be realistic.
I see a situation in which, today there is a beginning of a global economic recovery, but there are significant also downside risks. That's why, from a formal point of view, I'd rather be called Dr. Realist even if the nickname of Dr. Doom seems cute.
Hill: What if we shorten it, what about Dr. D -- does that work for you?
Roubini: I don't know about that -- Dr. R for Roubini, maybe.
Hill: We'll have people email us at MotleyFoolMoney@Fool.com. If we get any good nicknames, we will pass them along to you.
Roubini: Thanks a lot.
Hill: In preparing for this interview, I checked with a lot of my colleagues, a lot of advisors and analysts here at The Motley Fool. They offered up some questions, and one of them came from Robert Brokamp, who's our retirement expert. This is a guy who knows more about retirement planning than anyone I know. He's an incredibly smart guy and published author. When I said I was going to be interviewing Nouriel Roubini, here was the question he gave me: "How can we meet hot chicks like he does?" Because, again, kind of like you're the only economist I know with a nickname, you're the only economist I know who is photographed with just a stunning array of women.
Roubini: I would say I'm an economist but I'm not a white, dead economist, and therefore, I'm alive and I have a social life.
Hill: I have a 4-year-old son. Should I be encouraging him to become an economist someday?
Roubini: Yes. You know, being an economist these days is cool. If you think about it, macro issues have been dominating the headlines for the last few years. So while you can follow individual stocks or the market, unless you have the big picture, then you're not going to get it right. If the forest is burning, picking the right tree or the right fruits on the tree is not going to do any good because you have this global macro shock that affects actual investment returns. That's why having the macropicture, I think, is actually very important and interesting.
Hill: Is that level of celebrity strange, though? You're a noted economist. You're a professor at NYU. It's got to seem almost surreal.
Roubini: Well, you know, you have to take it with some grain of salt. This is a business in which you feel a bit like an athlete, you're as good as your last call. That's why me and also my company of 40 analysts, we follow every country day by day. You have to be nuanced in understanding what's happening and try to understand how this global economy and financial markets are going to evolve. So with celebrity, you're also on the spot and therefore, you have to be realistic and sensible and try to understand and get it right day after day.
Hill: What do you think will be the next big financial crisis?
Roubini: In my view, the next stage of this financial crisis is on the fact that this buildup of public debt and deficits in some countries is going to lead to sovereign defaults if they cannot essentially monetize these deficits. While in countries like the U.S., the U.K., and Japan, they can go and print money and monetize this fiscal deficit, the outcome is not going to be default but rather inflation. But if you think of it, inflation is a capital levy on public debt. It transfers wealth from savers and creditors, so it is a capital levy, but it's a more kind of sneaky capital levy than outside default.
Hill: All right, professor, we're going to wrap up with a round of buy, sell, or hold. There's a lot of uncertainty in light of the BP spill, so buy, sell, or hold oil?
Roubini: I would say hold, because on one side, the supply is not growing fast enough in the oil market. On the other side, in my outlook for weak economic growth, the demand is going to be also weak. So, compared to currency levels, I would say oil prices are not going to go much higher.
Hill: Buy, sell, or hold the likelihood that we'll see a crash in China's real estate market in the next two years.
Roubini: I would say buy. There will be a crash in the real estate market, both commercial and residential in China in the next couple of years.
Hill: You've been bearish on this in the past. Buy, sell, or hold gold?
Roubini: I would say hold for the time being. Gold may gradually increase, but to get gold to $2,000 an ounce, you need either very high inflation or another global financial meltdown. Those two risks so far have been reduced because of the policy response. Therefore, I see gold moving sideways and only gradually increasing in value.
Hill: OK. This woman is also an international celebrity, buy, sell, or hold Lady Gaga?
Roubini: I would say buy; she's really a superstar.
Hill: Are you a fan of her music?
Roubini: Yes, I love her songs, and she's a great performer as well.
Hill: Finally, you will be appearing in two movies this fall, including Oliver Stone's sequel to Wall Street, so buy, sell, or hold the acting career of Nouriel Roubini?
Roubini: I would say buy. I'm going this weekend to Cannes at the film festival and it will be the world premiere of these two films.
Hill: Can I borrow your life just for a week or so?
Roubini: I'm sure your life is quite interesting as well.
Hill: It is quite interesting; it just doesn't involve the Cannes film festival. The new book is Crisis Economics: A Crash Course in the Future of Finance. Professor Nouriel Roubini, thanks so much for being here.
Roubini: Great being with you today.
Chris Hill doesn't own any of the stocks discussed. The Motley Fool has a disclosure policy.