Stephen Roach has a bone to pick with Congress

Echoing my sentiments in the last post, “The U.S. banking crisis: where are we?,” Stephen Roach, the head of Morgan Stanley Asia has made a blistering attack on the U.S. Congress. He has labeled Congress’s response to crisis over-regulation and sees many more losses to come from real economy effects of the global credit crisis.

Roach went on to say that China will feel the full brunt of the crisis and that Asia is only 10% through the crisis impact on that region. Below are his words from an article in the Canadian newspaper National Post’s finance daily National Post.

One of the top U.S. bankers in Asia slammed the reaction from the U.S. Congress to the financial crisis, and warned of lasting repercussions for world trade while forecasting the turmoil is still in its early stages.

Congress’ 110-page response to U.S. Treasury Secretary Henry Paulson’s $700-billion emergency funding plan is too complex and will result in too much regulation and bureaucracy, said Stephen Roach, head of Morgan Stanley in Asia.

“For those of you who fear that after this crisis comes a severe regulatory backlash, your fears are well founded,” said Mr. Roach, noting that Congress’ proposal involves setting up four new bureaucracies to oversee the rollout of the emergency funds.

Congress deserves only a “C-minus or D-plus,” he said, adding the politicians have not even made it clear whether all or just a portion of the funds will be delivered soon.

The “less than optimal” proposal from Congress now shines the light on Federal Reserve Chairman Ben Bernanke, who should consider cutting interest rates by 50 basis points, Mr. Roach said.

But what will alarm most people outside of Wall Street is the leading investment banker’s forecast of lasting economic turbulence even after approval of the massive crisis funding plans.

“The worst of the financial piece may be behind us but don’t ignore the real economic piece. Most of that has yet to come,” said Mr. Roach, who was speaking at an investment industry conference in Hong Kong on Monday.

There are real fears among many economists that Wall Street’s pain is just the tip of the iceberg.

“This is going to be a big, big, big bill, and it will require very substantial global, coordination,” said a former senior executive with another U.S. investment bank in Asia. The final cost of supporting U.S. mortgages, the financial sector, airline makers, car manufacturers and more could be between US$2-trillion and US$2.5-trillion, added the experienced senior banker.

Meanwhile, Mr. Roach said the crisis will have a far-reaching impact on global trade, and China’s export-driven economy in particular.

No other group of buyers will be able to fill the void left by U.S. consumers who are “toast” after indulging in “the most excessive consumer binge in history” that was not backed by rising incomes, Mr. Roach said.

He also warned the deepening crisis could tempt U.S. lawmakers to pass legislation that will further harm trade with China in the belief that cheap Chinese labour has been partly to blame for the crisis.

The “Asia stage” of the current crisis is only about 10% complete so far, he added.

His comments contrast with those of Chinese premier Wen Jiabao on Saturday. The Chinese leader told the world economic forum at Tianjin, in northeast China, that his government has “full confidence and capability to overcome various difficulties to ensure sound and fast growth of the national economy for an even longer period of time,” according to Xinhua daily.

China’s GDP growth is widely expected to fall from nearly 12% in 2006 and 2007 to about 8% within the next six months

Peter Alexander, principal of Shanghai-based investment industry consultants Z-Ben Advisors Ltd, also had a more optimistic view of China’s economy.

“Mr. Roach says China’s going to hell in a hand basket, but we’ve heard a lot of people say that before,” said Mr. Alexander, who was also speaking at the Hong Kong investment industry conference. “We say never bet against China,” Mr. Alexander added.

I would also add that I anticipate some very nationalistic responses from government as the full effects of this crisis take hold. In a March post on Credit Writedowns, I said the following:

The global economy, now supported in the main only by the overextended U.S. consumer, finds itself at stall speed, susceptible to any number of potential exogenous shocks. Ultimately, the economic malaise created by this confluence of events will take years to unwind. A positive outcome to this process is dependent wholly on liquidation of excess credit and consumption.

This process will be extremely painful in the short term, but will lead to a healthy economy long-term. Unfortunately, experience shows that these painful steps will only be taken as a last resort. Moreover, geopolitical events become volatile in a world of economic insecurity, leading to political upheaval and protectionism. Protectionism is a natural outgrowth of nationalist economic policy as it transfers wealth from foreign producers to domestic producers by cutting off access to lower cost excess capacity in the goods in service sectors. However, this also serves to transfer wealth from domestic consumers to domestic producers by increasing the price of goods in the protected sectors, ultimately reducing consumption demand.
The U.S. Economy 2008

My hope is that government does its part in proactively looking to solve this crisis. I do not want to see knee-jerk adhoc nationalistic, protectionist responses. Perhaps, this time will be different and governments can proactively address the problems the global credit crisis has caused.

Morgan Stanley’s Asian head gives poor grade to U.S. Congress on response – National Post

  1. stevie b. says

    “Mr. Roach says China’s going to hell in a hand basket, but we’ve heard a lot of people say that before”

    Edward – thanks again for keeping us up to speed on the thoughts of Chairman Steve. I for one can’t get enough of them and the guy you quoted above should realise that Stephen Roach is not like
    “a lot of people”.

    Given his other comments and those of this article in The Times, are we looking to a future of World Trade R.I.P.?

  2. Edward Harrison says

    Good catch on the Mandelson article. I think we are seeing a resurgence of economic nationalism. I said in my post The US Economy 2008 that geopolitical events become volatile in a world of economic insecurity, leading to political upheaval and protectionism. Protectionism is a natural outgrowth of nationalist economic policy.

    We will see much more of this going forward.

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