Morgan Stanley's Steven Roach:
Quote:
Will the Fed rate cut work?
Posted by: Stephen Roach, Chairman, Morgan Stanley Asia
Timing is everything, I guess. No sooner had I arrived in Davos, when my Blackberry started chirping with alarms over an emergency 75 basis point Fed rate cut. No new news on the state of the US economy was evident. The only breaking development was a swoon in global equity markets that was likely to be reflected in the form of a similar plunge in the US. And so the Fed jumped into action. Borrowing a page from the market-friendly script of the Greenspan Fed, Bernanke & Co. offered up a market-friendly action of its own.
Will it work? That’s undoubtedly the question that will be hotly debated this year in Davos – a question that I certainly plan to tackle at the opening session on the global economy tomorrow (Wednesday) morning.
The answer lies in the unique character of this recession. There are two triggers - a bursting of the US house price bubble and a bursting of the credit bubble. I do not believe that aggressive Fed rate cuts will resolve the extreme imbalance between supply and demand in the US property market that will be pushing housing prices lower for some time. Nor do I believe that recent Fed actions will restore the functioning of credit markets to their pre-crisis state. As a result, pressures are likely to remain intense on housing - and credit-dependent US consumers - a sector that accounts for a record 72% of US real GDP.
In essence, the Fed is "pushing on a string" here - unable to stop the recessionary dynamic now unfolding. But there will be consequences in the next recovery. Unfortunately, the US central bank can’t seem to break out of the market-friendly trap it fell into nearly a decade ago Panicking over the possibility that yet another bubble is bursting, the Fed is once again injecting liquidity into an asset-dependent US economy. That won't arrest the recessionary dynamic now unfolding but it could well set the stage for the next asset bubble in America's bubble-prone economy. Have we learned anything from the mess of the past seven years?
01/22/2008
worth some readers' comments:
http://blogs.ft.com/davosblog/2008/0...he-fed-ra.html
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Agreed, that guy is not liked for having a reputation of being a pessimist. But what is pessimism for some, is realism for others. I myself do not read him often in German press, but when I do, I have learned it is worthy to listen closely. He is right - damn often.
And while we are at this guy, and since globalisation has a lot to do with your economic problems, this, from the same site:
Quote:
Dcoupling or globalisation - but not both
Posted by: Stephen Roach, Chairman, Morgan Stanley Asia
Dreams of decoupling danced in the air on this first official day of meetings at Davos. Decoupling, of course, is the latest macro fad - a scenario where the world no longer sneezes when the US catches a cold. The decoupling enthusiasts were out in full force at the kick-off session on the global economy on Wednesday morning. As a long-standing panelist in this session - with the exception of last year, when only optimists were invited - I didn’t offer much support for this view.
My case is relatively simple. Developing Asia - where the growth dynamic is the strongest and the hopes of resilience are the deepest - remains very much an externally-dependent economy. For the region as a whole, exports hit a record high of 46% of GDP in 2007 - more than double the 19% share of 1980. At the same time, private consumption fell to a record low of 48% of pan-regional GDP in 2007 - down sharply from the 66% reading in 1980. If the fast growing economies of East Asia were truly decoupled, these trends would be the opposite - exports would be falling and domestic consumption would be rising.
The decoupling crowd also dreams of alternative sources of global consumption arising from Asia’s two new giants - China and India - that would be more than sufficient to offset a shortfall in US consumption. Don’t count on it. The US consumed over $9.5 trillion in 2007 - fully six times the combined consumption totals for China ($1 trillion) and India ($650 billion). It would be almost mathematically impossible for "Chindia" to fill the void that is likely to be left by a consolidation of the American consumer. For externally-led Developing Asia, the proverbial sneeze in the face of a US cold is more likely than not. Maybe that’s what the recent sharp correction in Asian equity markets is all about.
In the Q & A part of the session, howls of protest came from representatives of Latin America, Central Europe, and even Asia. The European decoupling advocates accosted me in the halls outside the session. Yet globalization, long the mantra of Davos, is all about increased integration of the global economy through trade and capital flows. As I said to one of the more hopeful: "You either believe in decoupling or globalization - but not both."
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