US economist Roubini calls for the Credit Suisse economy to be split up
Star economist Nouriel Roubini is known for making gloomy predictions about the future. This has earned him the nickname “Dr. Doom”. In the current crisis, several banks and the slump in shares at the major Swiss bank Credit Suisse, Roubini sees signs of a new economic crisis.
The CreditSuisse, one of Switzerland’s two major banks, came under heavy pressure this week. The National Bank then provided her with an emergency loan of up to CHF 50 billion. Is everything okay now?
Of course, the protection provided by the National Bank is helpful in calming the markets. But it doesn’t solve the fundamental problem. Credit Suisse is for a country the size of Switzerland too big to sink. It is at once too big to fail and too big to be saved. The US is a $20 trillion economy and the Fed has the money to prop up the little Silicon Valley Bank or others. But just securing Credit Suisse requires six percent of Switzerland’s gross national product. If the bank needed a full bailout, the National Bank would not have enough money for it.
What do you suggest?
You have to split the bank into three parts, as management has already envisaged. Credit Suisse is too big. And the weakness of one part, for example the investment bank, damages the good parts, i.e. the commercial bank and asset management for institutional investors and private individuals. The sooner the bank is split up or sold, the better.
Do you give Credit Suisse’s new investment bank a chance?
I don’t know. The first concern for Switzerland should be that Credit Suisse remains solid as a commercial bank, with good deposits and healthy credit. It would not be a global financial institution on its own, but why take this systemic risk?
With the catchy name of Credit Suisse First Boston, it could perhaps score points on the major financial markets.
I doubt that trying to revitalize the heritage brand First Boston makes sense in a world full of aggressive and successful investment banks. The investment bank was one of Credit Suisse’s weak points. There have been scandals, mistakes and mismanagement. Even the successful divisions in wealth management are bleeding because of the risk that the whole bank could go under. Credits are deducted, last year 100 billion Swiss francs. And now the bank is getting a lifeline of 50 billion. If the bank continues to bleed, the difficulties will increase. Credit Suisse should use the lifeline to split up the bank and make it less systemically important.
Do you think Credit Suisse’s problems today are worse than UBS’s in 2008?
Back then, UBS and other banks suffered from the credit risk of bad mortgages and toxic derivatives. This time the risk – in the US at least – comes from the different maturities and yields of bonds. However, if we experience a hard landing in the fight against inflation, credit risks similar to those of 2008 will very soon be added. We have to prevent that.
How important do you think the demand for stricter regulations is?
After the worldwide financial crisis From 2008 two things happened: First, the banks became more regulated and had to have more liquid money at their disposal. Secondly, risks migrated from the banks to other financial institutions, i.e. shadow banks, hedge funds, private capital companies. In addition, corporate debt increased drastically. Concerns about credit risk have overlooked the threat of maturity risk. They worried nobody. As always, one fights the past war. Now we must learn the lesson again.
In addition to mismanagement, the main reason given for the collapse of the two US banks was the central bank’s long-standing policy of low interest rates, followed by an extremely steep rise in interest rates in recent months. What is true about this analysis?
Of course, the easy money created huge bubbles in everything from stocks to bonds to commodities. The money was too cheap, it was invested risky, and now the party is over. That part of the story is true. But at the same time, individual institutions took avoidable risks by ignoring the mismatch between maturity and yields on bonds. It was my own fault.
Did the US deposit insurance fund ultimately bail out the tech industry with its deposit guarantee for two struggling US banks?
I understand that Silicon Valley Bank’s deposits had to be secured because tech companies depended on their money to survive. However, Signature Bank collapsed because it foolishly ventured into the cryptocurrency space. Silvergate Capital had previously stumbled upon this. This was a mistake by the banks and a huge moral hazard has now arisen as a result. If a bank knows that all deposits are protected without a cap, it will take excessive risks. If this moral hazard spreads to the rest of the financial sector, it is a very serious problem.
Is it even possible to create security with these huge financial institutions – or does the state always have to intervene in the end?
After the Great Financial Crisis, capitalization requirements were increased and banks were required to draw up plans for their orderly closure. But if you believe, for example at Credit Suisse, that such plans can avoid systemic effects in the event of a collapse, then that is an illusion. Even the collapse of Silicon Valley Bank had global repercussions.
From a great height, wouldn’t it be good to allow collapses to help market discipline prevail?
I believe in market discipline. But when a large institution collapses, risks arise for the whole system. The collapse of Lehman Brothers in 2008 led to a worldwide recession, a great depression threatened, and therefore action had to be taken. The solution lies in institutions that are not too big to fail. In the US, in Europe and in Switzerland we have an excess of banking activity with giants that cannot be saved but must not go under either. This problem is still unresolved.
In your new book “Megathreats” you describe the ten greatest threats to mankind. Does this fit with what happened in the financial sector this week?
In several chapters I describe the connection between cheap money and asset bubbles, debt and inflation. I specifically warned that inflation leads to higher interest rates, which in turn create debt traps. In a highly indebted world, economic and price stability are becoming increasingly incompatible.
Has the likelihood of stagflation increased with a stagnant economy and persistent inflation?
Clearly. After the events of the past week, the previously precarious situation has become even more dangerous. As inflation stubbornly persists, central banks continue to raise interest rates. This increases the risk of financial instability even further. A hard landing of the economy and financial markets becomes inevitable.
When will we tip into recession?
For this year I foresee a recession in highly developed economies, combined with banking crises and further corrections on the stock market.
You talk so negatively – no wonder you Dr. calls doom. How can a prophet of doom still enjoy life?
i am not dr Doom, I’m Dr. Realist. In my book, I don’t write about an asteroid impact on Earth or an alien takeover. I write about what everyone recognizes as economic, financial, and non-financial risks. I call them mega threats. The Financial Times speaks of “poly-crises”, in which economic and non-economic crises overlap. When I appeared on a panel at the International Monetary Fund in December, Director Kristalina Georgieva agreed, speaking of a “confluence of disasters” not seen since World War II. In Davos, a risk report by the World Economic Forum predicted the “most turbulent decade” in a long time. What you call it is not important. Everyone says the same thing.
But their gloomy forecasts go particularly far.
I’m in good company. No one disputes the dangers I have described: war between major nations, climate change, pandemics, artificial intelligence job losses, threats to democracy, deglobalization and protectionism, economic and financial crises. These are real risks. Anyone who denies them is lulled into illusions.
Where do you see effective counteracting forces that could have positive effects?
Mainly in technology. Technical innovations have a deflationary effect because they increase supply. They increase potential growth. But they also create problems by bringing with them high levels of unemployment, even for the qualified. Thanks to machine learning, robots, automation and artificial intelligence, we may have 10 percent growth one day, but we also have 8 percent unemployment. This will increase inequality. The top 10 percent, who also own the new machines, will be fine. For many others there will be an unconditional basic income. In the process, the dignity of work is lost, as is political stability. The side effects can get grim, but technology alone can help against the major threats.