The housing bubble crisis counselers

Since moving far to the east a year or so ago to head up Morgan Stanley Asia, Stephen Roach hasn't been heard from much here in the West.

After years of criticizing Federal Reserve policy (see the classic "Batonless") and now that the mortgage lending meltdown and credit crunch of which he warned have arrived in full force, it seemed only fitting that Fortune Magazine include him as one of thirteen "Crisis Counselors" along with other favorites of this blog, Warren Buffet, Robert Shiller, Jim Rogers, and Jeremy Grantham.

Don't let the picture fool you - Stephen Roach has been one of the few level-headed thinkers over the last five years. When everyone was losing their heads over rising rates of homeownership, savings gluts, financial innovation, and real estate wealth, Mr. Roach was warning the world about the untoward and long-lasting effects of Fed policy under Alan Greenspan - nobody really listened back then, but more people are listening now.

The failure of central banking
Stephen S. Roach
Chairman, Morgan Stanley Asia

For the second time in seven years, the bursting of a major-asset bubble has inflicted great damage on world financial markets. In both cases--the equity bubble in 2000 and the credit bubble in 2007--central banks were asleep at the switch. The lack of monetary discipline has become a hallmark of unfettered globalization. Central banks have failed to provide a stable underpinning to world financial markets and to an increasingly asset-dependent global economy.

The current post-bubble shakeout is hardly an isolated development. Basking in the warm glow of a successful battle against inflation, central banks decided that easy money was the world's just reward. That set in motion a chain of events that has allowed one bubble to beget another--from equities to housing to credit.
...
It is high time for monetary authorities to adopt new procedures--namely, taking the state of asset markets into explicit consideration when framing policy options. As the increasing prevalence of bubbles indicates, a failure to recognize the interplay between the state of asset markets and the real economy is an egregious policy error.

That doesn't mean central banks should target asset markets. It does mean, however, that they need to break their one-dimensional fixation on CPI-based inflation and also give careful consideration to the extremes of asset values. This is not that difficult a task. When housing markets go to excess, when subprime borrowers join the fray, or when corporate credit becomes freely available at ridiculously low "spreads," central banks should run tighter monetary policies than a narrow inflation target would dictate.

That seems to be an increasingly popular view - much more in Europe than here in the U.S., but the Bernanke Fed will probably figure this out eventually.

Most of the other crisis counselors offered similar views (not many easy solutions):

• Warren Buffett - Chairman and CEO, Berkshire Hathaway
• Wilbur Ross - Chairman and CEO, WL Ross & Co
• Henry M. Paulson - Secretary of the Treasury of the United States
• John Mack - Chairman and CEO, Morgan Stanley
• Bill Miller - Chairman and chief investment officer, Legg Mason
• Robert Shiller - Stanley B. Resor professor of economics, Yale
• Jim Rogers - Founder of the Rogers Raw Materials Index
• Jim Chanos - President and founder of Kynikos Associates
• Amy Brinkley - Chief risk officer, Bank of America
• Laura Tyson - Professor, Haas School of Business, Cal
• Jeremy Grantham- Chairman, GMO
• Ben Stein - Economist, writer, lawyer, and actor

Aside from Roach , Wilbur Ross had the some of the keenest insight as to how we got to where we are today and who's responsible:

I recently overheard two men arguing about who was better off. One boasted about his new car, the other about a plasma TV and so on, until one proclaimed, "I am better off because I owe more than you are worth." The second man conceded defeat. This anecdote summarizes the mortgage bubble. Americans spent more than they earned in 2005 and 2006 and borrowed the difference. The federal government did the same. Everyone secretly feared this was unsound but wanted immediate gratification, so there was applause for talking heads who said global liquidity would make these borrowings safe. Alan Greenspan went so far as to suggest that people take out adjustable-rate mortgages.

Don't forget that the former Fed chairman also marveled at the "financial innovation" otherwise known as subprime lending.