Wikinvest Wire

Stephen Roach on false recoveries

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.

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...
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.


Michael said...

I'm kind of wondering if anyone else saw the brilliant episode of South Park a couple weeks ago called "Margaritaville" which involved Stan's father decides the economy is angry and dons a bedsheet toga to preach to his neighbors that spending too much is what angered the economy and that it will not return until everyone shows it that they can be responsible. Meanwhile, Kyle tries to return his father's margaritaville margarita mixer, only to find out that it was financed and that the financing was sliced up into securities which nobody but the treasury can appropriately value. And Stan is left in town, trying to convince the masses that it's not a an angry entity but rather a construct which can only work when people show faith in it by spending money.

It's pretty hilariously brilliant.

Tim said...

Sounds pretty funny - I looked on YouTube and couldn't find anything.

Anonymous said...

Tim, you can find the episode here:
Season 13, episode 3

flatlaxity said...

It's ironic that today's stock market averages are equivalent to those in 1997-98. The return on bonds since 1981 have outrun that of stocks several times.

Yet we have Roach cast here as a perma-bear. The implication is that he'll never get out of the rut and that he'll be wrong when (and if, i.e., in what form) our economy recovers.

Perhaps our author can also cast some, out of the bevy of Wall St. drum-bangers, as "perma sunshine-pumpers."

Thankfully we have guys such as Stephen Roach.

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