October 11, 2011
Joe Nocera has a column touting what appears to be a very interesting recovery plan by Dan Alpert [a friend], Robert Hockett, and Nouriel Roubini. In describing Roubini, Nocera tells readers that his “consistently bearish views have been consistently right.”
Actually, this is not true. I recall in the fall of 2008, following the Lehman collapse, Roubini was running around telling reporters that all credit had become unobtainable. He claimed that firms could not even get letters of credit to ship goods overseas and that therefore trade was grinding to a halt. His evidence for this was that the Baltic Dry Goods Index had fallen through the floor.
I bothered to look into this issue because many people were contacting me to get my views on Roubini’s claim. On its face, it seemed wrong, since there were no reports of the sort of the shortages that would quickly result if trade had really stopped, but Roubini had been one of the people calling the crash so this seemed worth taking seriously.
It turned out that Roubini was right, both the quantity indexes and the price indexes had in fact fallen through the floor. The quantity indexes had fallen 80-90 percent from their pre-recession level and prices were also down by 30-40 percent or more.
This looks very scary, until you realize what the Baltic Dry Goods Index is. It is a spot shipping index. It measures the volumes and prices paid for shipping on the spot market. The vast majority of goods are not shipped on the spot market, they are shipped under long-term contract arrangements. Exxon-Mobil doesn’t just get a huge pile of oil and then start looking for a tanker to carry it. They have this negotiated in advance.
The spot market carries the surplus. In the case of oil, this would be the extra oil that might suddenly be needed in an economy that is growing faster than expected.
For this reason, it is not surprising that the spot market falls through the floor in a downturn. There are few if any places where demand is greater than expected. Therefore the plunge in the Baltic Dry Goods Index was exactly what we should have expected in the downturn and had nothing to do with an inability to get letters of credit.
I would not recount this story except for the fact that Roubini was one of the main promulgators of the double dip recession story. It was because of the spread of phony fears of a double dip (absent a euro zone collapse) that many in the media told us that the dismal September jobs report was “better than expected.” Instead of people being angered by what should have been seen as more evidence of a pathetic recovery, they were supposed to be relieved that at least the economy is not in a downturn.
It is irresponsible for economists to run around making sweeping claims that are not supported by evidence. When they end up being wrong their reputations should suffer so that their next round of irresponsible claims get less attention. I am sure that the paper that Nocera touts is well worth reading and I certainly intend to read it myself, but it is just wrong to say that Roubini’s “consistently bearish views have been consistently right.”