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Nouriel Roubini: How to Break Up the Banks, Stop Massive Bonuses, and Rein in Wall Street Greed

The prominent economist explains why the model of the financial supermarket is a disaster, and why it's so dangerous that Wall Street is back to business as usual.

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During the recent financial crisis, things that were traded on exchanges like equities-- there was tumult, there was noise, but there was never a freeze-up of these markets. But in dealer's markets, we had totally frozen markets for bonds, for derivatives, for credit derivatives, for lots of stuff. So I think market-making and dealing is actually only a source of profit for financial institutions-- under the guise of market-making and dealing, they're doing a lot of proprietary trading. I would not just take that away from them, I would also move away from dealers markets altogether to exchanges where there is full transparency, where commissions and fees and bid-ask spread are low.

ZC: A lot of economic observers in the
seemed to be saying recently that the financial sector was finally out of the woods. But what does the developing crisis in
Europe say about the state of the global banking system?

Roubini: First of all, we're not out of the woods. The definition of a crisis is when you have a bunch of policymakers who need to spend all day Saturday and Sunday to devise some last-minute rescue before markets open on Monday morning. By that standard, we had that crisis in Bear Stearns, AIG, TARP, you name it. We thought that was over, but just the other weekend, we had all of the finance ministers of
Europe getting together a rescue package before markets opened on Monday morning.

These packages are becoming larger—the latest one is $1 trillion. To me, that says that policymakers are desperate, the European Union is in crisis, a lot of the countries using the euro are insolvent, and $1 trillion is not going to be enough. The euro is weakening again, going toward 1.75 times the value of the U.S. dollar. It's not enough because the fundamental problem is that these countries need to do a massive amount of fiscal conservation. It will be politically and socially painful, and this conservation, necessary as it may be, is going to reduce economic output. When you raise taxes and cut spending, in addition to public debt and deficit problems, all of these countries have massive problems in terms of loss of competitiveness. Already a decade ago, they were losing market share to China and
Asia, then wages and productivity have been leveled off for a decade, and the final nail in the coffin was the appreciation of the euro between 2002 and 2008.

So in order to stabilize the economy to resume growth, in order to resume competitiveness, that requires real depreciation of the euro against other currencies. That's a separate problem from the fiscal problem and the other structural problems. So I think
Europe is going to be a mess and very difficult, regardless of whether you have $1 trillion on the table or $2 trillion on the table. All of this money is conditioned on painful fiscal austerity and on painful structural reforms. So I see it being very difficult for countries to find an effective way to solve all of these issues.

ZC: We've had a strong dollar policy in the United States for decades, accompanied by a very large trade deficit. Did either of those factors contribute to the crash in 2008?

Roubini: They contributed in the sense that all of the big problems-- this big housing asset bubble, the U.S. public and private sectors spending more than they had—these were associated with a large current account deficit. And that large current account deficit was associated with a strengthening of the U.S. dollar until the early part of the past decade that also adversely affected the
trade balance.