Peter Druker

Introduction

In January 2009, in the final days of the Bush administration, Vice President Dick Cheney sat down for an interview with the Associated Press. He was asked why the administration had failed to foresee the biggest financial crisis since the Great Depression. Cheney’s response was revealing. “Nobody anywhere was smart enough to figure [it] out,” he declared. “I don’t think anybodysaw it coming.”

Cheney was hardly alone in his assessment. Look back at the statements that the wise men of the financial community and the political establishment made in the wake of the crisis. Invariably, they offered some version of the same rhetorical question: Who could have known? The financial crisis was, as Cheney suggested in this same interview, akin to the attacks of September 11:catastrophic, but next to impossible to foresee.

That is not true. To take but the most famous prediction made in advance of this crisis, one of the authors of the book—Nouriel Roubini—issued a very clear warning at a mainstream venue in the halcyon days of 2006. On September 7, Roubini, a professor of economics at New York University, addressed a skeptical audience at the International MonetaryFund in Washington, D.C. He forcefully sounded a warning that struck many in the audience as absurd. The nation’s economy, he predicted, would soon suffer a once-in-a-lifetime housing bust, a brutal oil shock, sharply declining consumer confidence, and inevitably a deep recession.

Those disasters were bad enough, but Roubini offered up an even more terrifying scenario. As homeowners defaultedon their mortgages, the entire global financial system would shudder to a halt as trillions of dollars’ worth of mortgage-backed securities started to unravel. This yet-to-materialize housing bust, he concluded, could “lead . . . to a systemic problem for the financial system,” triggering a crisis that could cripple or even take down hedge funds and investment banks, as well as governmentsponsoredfinancial behemoths like Fannie Mae and Freddie Mac. His concerns were greeted with serious skepticism by the audience.

Over the next year and a half, as Roubini’s predictions started coming true, he elaborated on his pessimistic vision. In early 2008 most economists maintained that the United States was merely suffering from a liquidity crunch, but Roubini forecast that a much more severecredit crisis would hit households, corporations, and most dramatically, financial firms. In fact, well before the collapse of Bear Stearns, Roubini predicted that two major broker dealers (that is, investment banks) would go bust and that the other major firms would cease to be independent entities. Wall Street as we know it, he warned, would soon vanish, triggering upheaval on a scale not seensince the 1930s. Within months Bear was a distant memory and Lehman Brothers had 5

collapsed. Bank of America absorbed Merrill Lynch, and Morgan Stanley and Goldman Sachs were eventually forced to submit to greater regulatory oversight, becoming bank holding companies.

Roubini was also far ahead of the curve in spotting the global dimensions of the disaster. As market watchers statedconfidently that the rest of the world would escape the crisis in the United States, he correctly warned that the disease would soon spread overseas, turning a national economic illness into a global financial pandemic. He also predicted that this hypothetical systemic crisis would spark the worst global recession in decades, hammering the economies of China, India, and other nations thought to beimpervious to troubles in the United States. And while other economists were focused on the danger of inflation, Roubini accurately predicted early on that the entire global economy would teeter on the edge of a potentially crippling deflationary spiral, of a sort not seen since the Great Depression.

Roubini’s prescience was as singular as it was remarkable: no other economist in the world foresaw the...