Tuesday, April 14, 2009
In a piece at Bloomberg today, Stephen Roach, Chairman of Morgan Stanley Asia and well known "perma-bear" (who happens to have have been right about many more things than any "perma-bull" in this decade), thinks that policymakers have it all wrong.
The Fed wants to get credit flowing again to still overextended American consumers, especially in mortgage markets. The Congress wants to stop the bleeding in the housing market -- irrespective of the persistent imbalance between supply and demand. And the White House wants consumers to start spending again -- to avoid the perceived pitfalls of the “paradox of thrift” brought about by too much saving.There are no easy solutions here. The last easy solution was used up in 2002-2003 when a stock market bubble transitioned to a housing bubble.
Put it together and it all smacks of a dangerous sense of déjà vu: promoting a false recovery by kick-starting overextended, saving-short American consumers to borrow once again by leveraging their major asset.
Fortunately, the American consumer is smarter than the quick-fix Washington mindset. Shell-shocked families -- especially some 77 million baby boomers for whom retirement planning is an urgent imperative -- know they have no choice other than to save. The personal saving rate has risen from 0.8 percent to 4.2 percent in the past six months alone, and is on its way to a new post-bubble equilibrium that I would place in the 7.5 percent to 10 percent zone.
Yet policy makers fear such an outcome...