Stephen Roach: “I Would Have Voted Against…
10 July 2010
Some harsh words from the former Morgan Stanley’s Asia vice chairman addressed to Bernanke, saying that “his policy approach has always been since he was an academic to condone asset bubbles, argue that central banks do not need to pay attention to asset prices in setting monetary policy, that they had the firepower to clean up a mess after the bubble had burst.” Ironically, Roach has been a steadfast supporter of Chinese monetary policy, which many objective observers have opined is a one-for-one replica of our own Fed’s policy right here in the United States, which invoked the question during the interview: “Are you China’s Alan Greenspan?”. Regardless, Roach is sticking to his side of the story: “I think it’s really wrong to view China as an enormous macro property-bubble story.” On the other hand, entire ghost cities, empty apartment buildings, massive losses on bank property books and urgent recapitalization efforts by most of the China’s top property lenders, seem to indicate otherwise. Either way, how nobody has figured out to put Chanos and Roach in the same room together, tape it, and become an instant millionaire is confusing.
Roach: I’d give it a higher probability than most, maybe 40% at some point over the next year. We have a weak recovery, weak labor market, weak consumer purchasing power…and a consumer that’s unable to rely on property and credit bubbles to support consumption anymore. So if you have a disappointing consumer and any kind of unexpected shock you could go down again. […] Double-dips are not as infrequent as you might think…Weak recoveries leave you vulnerable to shocks.
On the austerity/stimulus debate:
Roach: I think [Fed policymakers] have done more than enough at this point. [Interest rates] are at levels that actually would insulate the economy in the event of a double-dip…I think they should actually have rates higher than they are right now.
On former Fed Chairman Alan Greenspan:
Roach: I think that one of the problems we had in the aftermath of the bursting of the equity bubble is that Alan Greenspan kept the policy rate too low for too long, set us up for credit and property bubbles that led to an enormous crisis, [and] I think Ben Bernanke is just rerunning the Greenspan movie of seven or eight years ago.
On Chairman Bernanke:
Roach: I would have voted against him, I think he’s a great public servant, from what I hear a very nice and kind man, but his policy approach has always been since he was an academic to condone asset bubbles, argue that central banks do not need to pay attention to asset prices in setting monetary policy, that they had the firepower to clean up a mess after the bubble had burst. Well, look at the mess we’re in right now. That approach really has been rendered obsolete by the great crisis of ’08-’09 and I think needs to be changed.
On whether the Chinese economy is in a “bubble”:
Roach: Chinese authorities have a completely different approach in dealing with maters of asset bubbles, credit bubbles…they are preemptive, the U.S. is reactive. China wants to build firewalls between the asset markets and the real economy so they certain do have, or they did have, I should say, a high-end property bubble…in April they took extremely tough actions to curtail multiple purchases by speculators and they stopped! And they did that before the housing bubble got bigger and ended up distorting the real economy, so they’ve done a good job. […] I think it’s really wrong to view China as an enormous macro property-bubble story.
Are you making the Greenspan argument now about China? Are you China’s Alan Greenspan?
Roach: Oh God, I hope not.
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