Nouriel Roubini: "The Anglo-Saxon model of regulation of the financial system has failed"

[Better Believe It]

The Worst Economic and Financial Crisis Since the Great Depression Reveals the Weaknesses of the Laissez Faire Anglo-Saxon Model of Capitalism
by Nouriel Roubini
February 19, 2009

It is now clear that this is the worst financial crisis since the Great Depression and the worst economic crisis in the last 60 years. While we are already in a severe and protracted U-shaped recession (as the deluded hope of a short and shallow V-shaped contraction has now evaporated) there is now a rising risk that this crisis will turn into an uglier multi-year L-shaped Japanese style stag-deflation (a deadly combination of stagnation, recession and deflation). The latest data on Q4 2008 GDP growth (at an annual rate) around the world are even worse than the first estimate for the US (-3.8%): -6.0% for the Eurozone; -8% for Germany; -12% for Japan; -16% for Singapore; -20% for Korea. The global economy is now literally in free fall as the contraction of consumption, capital spending, residential investment, production, employment, exports and imports is accelerating rather than decelerating.

To avoid this L-shaped near-depression a strong, aggressive, coherent and credible combination of monetary easing (traditional and unorthodox), fiscal stimulus, proper clean-up of the financial system and reduction of the debt burden of insolvent private agents (households and non-financial companies) is necessary in the US and other economies.

The U.S. has done more (with its aggressive monetary easing and large fiscal stimulus putting it ahead) but two key elements are key to avoid a near-depression and still seriously missing: a proper clean-up of the banking system that may require a proper triage between solvent and insolvent banks and the nationalization of many banks, even some of the largest ones; and a more aggressive and across-the-board reduction unsustainable debt burden of millions of insolvent households (i.e. principal reduction of the face value of the mortgages, not just mortgage payments relief).

It is clear that the Anglo-Saxon model of supervision and regulation of the financial system has failed. It relied on self-regulation that, in effect, meant no regulation; on market discipline that does not exist when there is euphoria and irrational exuberance; on internal risk management models that fail because – as a former chief executive of Citi put it – when the music is playing you gotta stand up and dance.

Furthermore, the self-regulation approach created rating agencies that had massive conflicts of interest and a supervisory system dependent on principles rather than rules. This light-touch regulation in effect became regulation of the softest-touch.

http://www.rgemonitor.com/roubini-monitor/255627/the_worst_economic_and_financial_crisis_since_the_great_depression_reveals_the_weaknesses_of_the_laissez_faire_anglo-saxon_model_of_capitalism

[Still Sensible]

1. Hit the nail on the head

preach it!

[RandomThoughts]

2. calling it anglo-saxon regulation

I think is a bit disingenuous and stokes racial divides. It is not a racial issue, even though racial inequality is a part of society, and a problem.

Could you describe what makes it an "anglo-Saxon" model versus some other model? Which model is different then "anglo-Saxon"?

Just trying to figure it out here, what is an Asian model, what is an African model, what is a Hispanic model, what is a Native American model, what is an Indian model, etc...?

[leftstreet]

3. I don't get that either

:shrug:

[EraOfResponsibility]

5. hehe, you wouldn't n/m

[leftstreet]

8. Oh. You're still here.

:hi:

[EraOfResponsibility]

11. :)

[Aloha Spirit]

4. He was referring to anglo-saxon model of capitalism or corporate governance...

Not sayin I love the expression but here you go...

"Anglo-Saxon capitalism (so called because it is supposedly practiced in English-speaking countries such as the United Kingdom, the United States, Canada, New Zealand, Australia<1> and the Republic of Ireland<2>) is a capitalist macroeconomic model in which levels of regulation and taxes are low, and government provides relatively fewer services."

http://en.wikipedia.org/wiki/Anglo-Saxon_economy

[RandomThoughts]

6. my ignorance

led to misinterpretation of the symbol "Anglo-Saxon"

Not that wiki is a best source, but it even comments on the duality of that symbol

A common usage of "Anglo-Saxon" in the English-language media relates either to the language spoken in the area which would become England, or the people of these areas, after the arrival of Germanic tribes, primarily Angles and Saxons, in the 5th century. This usage is not linked to the use of "Anglo-Saxon" to refer to modern economic models.

With all the race conversation, my brain saw it in the wrong context as a racial economic comment.

A little reading leads me to believe a french 'persumed' right winger coined the phrase recently, odd choice of terms.

[Aloha Spirit]

7. I would really like to know what the rest of that article says...

I know he thinks that policy changes can spare us from the L shaped recession.
Which policies though.
There is so much to regulate and monitor, including international investment.
I don't know how you regulate international financial behavior.

[leftofthedial]

9. "Anglo-Saxon"

I call bullshit.

[EraOfResponsibility]

12. ...

I call bullshit.

Of course you do. :)

[leftofthedial]

15. I'm neither Angle nor Saxon, but that is racist bullshit.

[inna]

16. no it's not. unnecessarily ethnically charged - perhaps; racist -absolutely not. NT

[leftofthedial]

18. perhaps?

your reply is not credible.

[amandabeech]

14. I do, too. "Laize faire" (sp) is the less loaded term.

I have to wonder why Roubini used an unnecessary ethnic term.

He's a good economist, but this piece shows that he is either emotionally clueless or has a real chip on his shoulder.

[depakid]

10. Laissez Faire has failed- not the Anglo Saxon model

Last I looked, there weren't any bank failures in Canada or Australia.

Obama compliments Canadian regulation

President Barack Obama said the United States should take note of Canada's banks, which have avoided government bailouts and are now among the strongest in the world. In advance of his first foreign trip, Obama said in an interview with the Canadian Broadcasting Corp. on Tuesday that Canada has shown it is a good manager of its financial system.

Obama heads to Canada on Thursday as the financial crisis threatens the solvency of U.S. banks. "One of the things that I think has been striking about Canada is that in the midst of this enormous economic crisis, I think Canada has shown itself to be a pretty good manager of the financial system in the economy in ways that we haven't always been here in the United States," Obama said.

"And I think that's important for us to take note of, that it's possible for us to have a vibrant banking sector, for example, without taking some of the wild risks that have resulted in so much trouble on Wall Street."

http://www.iht.com/articles/ap/2009/02/18/business/NA-Canada-Obama-Banks.php

and from down under- an end to ATM fees:

Reserve Bank Governor Glenn Stevens has said there is no strong case for banks to impose fees on people who use Automatic Teller Machines of a bank other than their own.

Historically, banks have charged people a 'foreign' fee for customers using an out-of-network ATM. An RBA-enacted change requires the machines to show how much extra transactions will cost consumers on the spot.

Starting on March 3, the RBA will ban 'interchange' fees paid between banks when customers from one network use another bank's fees. The central bank is seeking to stop banks from charging 'foreign fees' to cover the cost of electronic processing, which RBA governor Glenn Stevens said today was ''no more than 10 cents.''

''We cannot see any strong case for a foreign fee,'' said Mr Stevens. ''Now people will know exactly what the price of an ATM transaction is, and they will know it before completing the transaction.''

''There should be no foreign fees of any significance. And competition will be maintained.''

http://business.smh.com.au/business/stevens-slams-banks-over-atm-fees-20090219-8cbz.html

Could be Obama and the timid congressional Dems should take note of that as well....

[Better Believe It]

13. He didn't say "American" model but he clearly was pointing the finger of blame at the .....

U.S. Anglo-Saxon model.

No need to quibble about the words he used. We all know exactly what he meant .... don't we? I got it.

Does anyone really believe he's blaming Canada for the bankrupt model of capitalism?

[pampango]

19. Exactly. Canada has done an excellent job of regulating their financial industry.

They are about as Anglo-Saxon as the US is.

Calling an Anglo-Saxon approach to regulation is just a cute way to attract your attention. I think the Japanese, Koreans and Taiwanese have not done very well at bank regulation either and there aren't a whole lot of Anglo Saxons there.

[asteroid2003QQ47]

17. Wouldn't WASP been a more accurate descriptive term? n/t