Thursday, September 3, 2015

Nouriel Roubini: A Financial Early Warning System

In this recent article posted in Project Syndicate, Nouriel Roubini laments that there is currently no realiable early warning system in place to detect a global crisis ahead of time. This is something we have covered here quite a bit. Earlier we wrote a blog article about former IMF Peter Doyle complaining that the IMF fails at the task of providing an early warning.

Interestingly, in this article Nouriel Roubini seems to call for some kind of new system for early warning detection, but fails to provide any specific suggestion as to who should take on this function. Below are a few quotes from his article.

"Recent market volatility – in emerging and developed economies alike – is showing once again how badly ratings agencies and investors can err in assessing countries’ economic and financial vulnerabilities. Ratings agencies wait too long to spot risks and downgrade countries, while investors behave like herds, often ignoring the build-up of risk for too long, before shifting gears abruptly and causing exaggerated market swings.

Given the nature of market turmoil, an early-warning system for financial tsunamis may be difficult to create; but the world needs one today more than ever. Few people foresaw the subprime crisis of 2008, the risk of default in the eurozone, or the current turbulence in financial markets worldwide. Fingers have been pointed at politicians, banks, and supranational institutions. But ratings agencies and analysts who misjudged the repayment ability of debtors – including governments – have gotten off too lightly."

My added comments: The Peter Doyle article that was posted here on the blog also called for some kind of new system for early warning and suggested the IMF was not up to the task because there would always be political pressure to present a rosy forecast.

This appears to be the real problem. It really does not matter what agency or system you set up to provide an early warning for the financial system if it is never allowed to present an actual early warning due to political pressure not to do so.

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