This morning, I ran across a post by Prieur du Plessis, which linked out to a Stephen Roach interview on Charlie Rose.

Roach is the head of Morgan Stanley Asia and has been a voice to listen to when trying to discern where China is headed and how its relationship with the United States will develop. That was the topic of conversation between Roach and Rose. Through the links on that post I happened upon a 1996 Roach interview on Charlie Rose of a very different sort where he talked about the hollowing out of America and his concern for the future. I want to link those two below.

In the transcript of the recent China interview on Rose’s website, Roach marvels about the progress made in China:

CHARLIE ROSE: You left Wall Street to go live in China.

STEPHEN ROACH: I did. About three years ago, your friend and mine, John Mack, called me up and said, 25 years as an economist, a long time, good job. How would you like to do something different and be the chairman of Morgan Stanley’s business activities in Asia? And I told John I thought he was nuts. I had the best job. I wasn’t going to leave it. He said, "Think about it."

And, you know, John, when he says, "Think about it," there’s a fair amount of emphasis there. I did think about it. And I’d built fabulous relationships in Asia over the years, Charlie. I was passionate about the region. I thought I knew it well, but I knew in my gut that it would be a lot different from the inside than from the outside, and I said, yeah, I’m going to go for it.

And I’ve been out there now about two and a half years. And I have no regrets. I love it. I have learned an awful lot about Asia, and I thought it was time to put it down in a book and get it out there when the world is very focused on Asia, its own challenges and its role in the global economy.

CHARLIE ROSE: What do you love and what have you learned?

STEPHEN ROACH: What I am most passionate about in terms of Asia is what they’ve done, especially in China, over the last 30 years. You know, big celebration, 60th anniversary of the People’s Republic of China. But the first 30 years were pretty awful and the next 30 years have been spectacular. And the difference is they have really put huge focus on transitioning this economy from one that was owned by the state to one that is more of a market-based economy. They’ve taken huge risks in terms of reforms, layoffs, building market structures, building companies that we’ve never seen before. And to be on the inside and watching, watching that risk taking up close is a pretty fascinating experience for anyone. And I love every bit of it.

They go on to talk about the outlook there as well as how the government is dragging its heels on increasing domestic demand and shoring up a porous social safety net among other things. I definitely suggest you read the full transcript here. It makes for a better understanding of China. A snippet of the video is embedded below.

However, what was equally interesting to me was that Roach and Robert Reich were talking to Rose about concerns over the hollowing out of America’s workforce through downsizing (off-shoring had not yet gathered full steam).

Roach says:

“What has changed for me is my appreciation for what it has taken to get from point A to point B over the last ten years. It would be one thing if these productivity gains were built on the back of a more talented, skilled, educated, dynamic work force, but it’s another thing altogether if these productivity or efficiency changes were built on the basis of strategies that are hollowing out our companies, hollowing out our workforces, stagnating real wages – tactics in the end that can really lead to industrial extinction.

I’m sure you see the connection. If not, watch the video below in the context of the more recent video and your knowledge of what is happening in the global economy. I will say this: Roach was right about the dichotomy between the benefits to the owners of capital and the benefits to labor that these corporate strategies created.

Where I think his view could be tweaked looking back 13 years is in terms of what it has meant for Corporate America.  The hollowing out of America’s workforce and lack of investment domestically has not meant a hollowing out of Corporate America. Those companies that did downsize American workers in a ‘short-term’ play for next quarter’s earnings are many of the ones which have outperformed for the last 13 years because they have gone global. And the impressive leaps forward in China are testament to the gains made in places like China due in part to that move. It’s called ‘global labor arbitrage’ and it is what I see as the defining element of globalization as practiced.

In the end, however, a day of reckoning will come – not for the managers of the companies who have profited over the time span between these two interviews because they are going to keep their bonuses.  The day of reckoning for America will come in terms of the growth and dynamism of its middle class. Whether the U.S. then moves toward a Latin American style economic structure of a few rich at the top, a weaker middle class, and everyone else at the bottom or back to a more equal income and wealth distribution depends on the reaction by the ‘body politic,’ not on Wall Street.

Related posts:

• Stephen Roach: Downturn in Asia less severe, but recovery later
• Stephen Roach and Jim Grant: Video of credit crisis thoughts
• Stephen Roach is still bearish, no recovery until 2010
• Stephen Roach sees a W-shaped recovery for China
• Stephen Roach is talking double dip again

Stephen Roach doesn’t mince words.  He calls monetary policy during the bubble years “reckless and irresponsible” and he thinks politics is thwarting any meaningful regulatory reform, a view I also hold. I think the point of Roach’s attack is that a lot of finger-pointing has been directed at Wall Street and even Main Street. But, policy makers share much of the blame.  This is a point I tried to make in a post “Forget about Goldman” from this past summer.

Moreover, as Roach indicates, the concept that a central planner (which a central bank most certainly is) can allow bubbles to form and then clean up after the mess- is on it’s face absurd. But, clearly the Federal Reserve and other central banks are doing their level best to re-create the conditions which led to a near-financial collapse.

The money quote comes just about 4:45 through the eleven minute clip below:

Central bankers say trust us. We know what we’re doing. I don’t trust them one bit. They got us into this mess in the first place.

As for Asia, Roach sees a bright future. However, he warns that it has risen on the back of an unsustainable export-led macro-policy by selling things to people in the West who can’t afford them.  With continued private-sector deleveraging in the west likely, this dynamic has ended.

(video embedded below)

As an aside, Roach also correctly adds that the recent protectionist tariff administered by President Obama was not the result of tire manufacturers’ lobbying. Four of five of the Chinese importers are subsidiaries of U.S. firms. Obama did this to gain credibility and support from unions, a key Democratic constituency in the health care debate and in the run-up to the mid-term elections.

I should also point out that much of the U.S. trade deficit comes from such arrangements, where a U.S. company imports goods from its own foreign subsidiary.

Related posts:

• Stephen Roach sees a W-shaped recovery for China
• Stephen Roach: Downturn in Asia less severe, but recovery later
• Stephen Roach is talking double dip again
• Quote of the day: Stephen Roach
• Stephen Roach has a bone to pick with Congress

Nouriel Roubini is the most prominent economist to warn that a double-dip recession would be a distinct possibility if economic policy-makers return to policy normalization too quickly.  Now, Stephen Roach, head of Morgan Stanley Asia, is making similar arguments. 

Roach was on Bloomberg Radio’s show Bloomberg Surveillance with Tom Keene and Ken Pruitt yesterday, where he had a wide-ranging discussion about the global economy, China, Japan, government stimulus, and a host of other issues.

Some memorable quotes:

• China: “Late last year the Chinese economy came to a full stop and the government embarked on a massive investment and bank lending stimulus that I think is worrisome and not sustainable.”
• Japan: “The key premise I think that needs to occur in Japan as well as the rest of Asia is the need to really put a lot of emphasis on internal private consumption.”
• The Fed: “I am really critical of the idea that we can blame America’s problems on the so-called surplus savings glut primarily from China.”
• The U.S.: It looks like the worst of the downturn is behind us.”
• Banks: “The financial crisis itself is far from over. A lot of financial institutions will continue to find their earnings and their lending capacity impaired.”

The downside risks and double-dip that Roach points to for the U.S. and global economy should not be taken as a ‘base-case’ scenario but rather a possible outcome to avoid through the appropriate economic policy response.  I should note that the same risks were present on a lesser scale after the Technology & Telecom bubble-induced recession in 2001, and Roach warned of these risks at the time. We avoided a double dip in part because of loose monetary policy, which created the housing bubble.

He has a lot more to say. The audio is below and runs about 12 and 1/2 minutes. Enjoy.

Related posts:

• Stephen Roach sees a W-shaped recovery for China
• Stephen Roach: Downturn in Asia less severe, but recovery later
• Stephen Roach is still bearish, no recovery until 2010
• Quote of the day: Stephen Roach
• A conversation with Stephen Roach on Charlie Rose

The US is not the only place where a double dip downturn is to be feared.  China has its own economic imbalances to deal with.  Too much money is being thrown at the problem creating malinvestment and a bubble economy, shares having doubled this year alone.

Stephen Roach thinks much of the stimulus money in China has been wasted, potentially requiring a second stimulus package.

‘The impact of the investment-led stimulus will fade and the Chinese growth rate will start to slip again some time towards the middle of 2010,’ Roach said, suggesting that slowing growth could lead to increased layoffs and thus social instability.

‘That means, the Chinese authorities will be forced to contemplate another proactive fiscal stimulus.’

In May, Roach had said China may face a ‘W’-shaped economic recovery and had previously said that China’s current stimulus is directed too much at the pace of growth rather than the quality of the growth.

The former global chief economist for the U.S. investment bank also reiterated his concerns about excessive investments in infrastructure, rather than on stimulating private consumption or bolstering health care or social safety nets for Chinese.

‘Bottom line is they are creating a very unbalanced macroeconomic structure,’ Roach said in the interview, estimating that investment spending in the first half of the year as a share of gross domestic product had exceeded 45 percent of the economy.

‘This is a ratio unheard of in the annals of a modern, large developing economy,’ he said.

These are much the same complaints that can be levelled against US policy makers.  However, the scale of the endeavour in China is truly breathtaking.  And while the growth potential in China is still very strong, the economy has a number of significant problems with which to deal, unemployment being one.  Another mentioned by Roach is the need for the Chinese to save huge sums in order to meet health care costs and to insure against economic misfortune because of the porous social safety net.

Were the government to put more emphasis on increasing economic security, many Chinese would feel more comfortable spending and the economy would be able to wean itself from its reliance on exports.  However, to date, infrastructure has been the name of the game in China’s fiscal stimulus.  Come this time next year, we will have a much better handle on whether this growth dynamic is sustainable or whether the government needs to top up its stimulus with yet more money.

Source

China may need 2nd fiscal stimulus next yr-Roach – Forbes

Related posts:

• Stephen Roach: Downturn in Asia less severe, but recovery later
• Stephen Roach is talking double dip again
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• Stephen Roach is still bearish, no recovery until 2010
• Stephen Roach has a bone to pick with Congress

Here’s a nice clip from Stephen Roach from last week asking “where’s the demand?” 

His thesis is pretty simple:  we have an inventory-induced upturn that might actually show positive GDP growth in the U.S. for Q3, what I have termed the mother of all inventory corrections.  But, that’s it.  Underneath this is no discernible pickup in demand anywhere globally.  Add in a still massive number of writedowns to be taken by banks globally (at least $2 trillion by Roach’s estimate) and you can see that there are a lot of economic headwinds here.

My favorite part of this video is where the presenter says: “Stephen, you sound pretty bearish. Are you not a believer at all in that green sh**ts theory?”

The video runs 7:32 and covers a wide range of topics from inventories and consumer demand to China and systemic risk in finance.

In regards to markets, he makes the telling statement: “liquidity is seeking return,” suggesting that the market uptick since March is merely a liquidity-driven bear market rally.  This is something I have been suggesting as well.  See posts Is quantitative easing really inflationary? and Does Ben Bernanke blow bubbles too? for more.  The thing is these rallies can go higher and can last longer than most market participants would expect.

Related posts:

• Stephen Roach and Jim Grant: Video of credit crisis thoughts
• Stephen Roach sees a W-shaped recovery for China
• Stephen Roach: Downturn in Asia less severe, but recovery later
• Stephen Roach is still bearish, no recovery until 2010
• Quote of the day: Stephen Roach

Recently, I have highlighted the comments of a number of investing gurus, most of whom are fairly positive on the market. This includes Jeremy Grantham, Marc Faber, Bill Fleckenstein, Fred Hickey, Marty Fridson and Steven Leuthold (Louise Yamada is a notable exception).  However, when it comes to the global economy, the situation is much murkier, the likes of David Rosenberg at Merrill Lynch/BofA have made the case for continued economic weakness in the United States.

The standard bearer of the global-economy-is-weak-and-needs-rebalancing theme is Morgan Stanley Asia head Stephen Roach. And he is not a tad bullish on the global economy.

The world is moving into the second wave of the financial crisis, which will be symbolized more by the deterioration in the global business cycle than the financial market itself, said Stephen Roach, chairman of the Hong Kong-based Morgan Stanley Asia.

“I think the second wave will be driven by the weakening of profitability of corporations around the world and that will have a negative impact on their ability to pay back loans to banks and other financial institutions,” said Roach in an exclusive interview with Xinhua at Morgan Stanley Asia’s headquarters.

The first wave came about through the so-called subprime crisis, sparking a broadly based and severe recession in the world economy, he said.

Out of the recession, now comes further weakness in loans outstandings by financial institutions, which will have further negative impact on the earnings of the financial institutions.

“So I think the second wave is just beginning, which reflects more the impact of global business cycle than the credit market contagion itself,” said the chairman.

GRIM OUTLOOK FOR WORLD ECONOMY IN 2009

Roach noted that the world economic recession is not bottoming. “I think there’s more to come in terms of the weakness of the world economy.”

“When the year is finished, I think 2009 will represent the first decline for an entire year in world GDP we have see since the end of World War II,” he said.

Roach said that the drops of the global economy in the last three quarters of the year may not be as severe as in the early months of 2009, but the global economy is going to keep declining.

“There is weakness across the world. Every major developed economy is in recession. We’ve never seen that before,” he said.

And most large developing countries, including China, are either slowing very sharply or they are too in recession.

“This is a synchronous downturn in the global economy. There is quite a great deal further to go in my opinion,” he said, adding that unemployment will keep increasing for the better part of the final three quarters of 2009.

The world economy may bounce up a while by the end of the year, as there had been very steep decline in most economies in the fourth quarter of 2008 and equally steep drop in first quarter of 2009, he said.

“So statistically, you can get a positive increase in some point in the remaining three quarters, but that will be short-lived,” he said.

In large part, the global economy will be in a contraction mode through the end of this year, possibly, in the early of next year, he said.

The article goes on to present Roach’s view on major risks for 2009, as well as the Chinese growth story. But, the long and short of Roach’s view is that a weak global recovery will not begin until 2010.

Details at the link below.

Source
Stephen Roach: World moving into second wave of financial crisis – Xinhua

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• Stephen Roach has a bone to pick with Congress

Morgan Stanley Asia head Stephen Roach believes that Asia will weather the economic storm with a less severe downturn than the West. However, as the economies are predominantly export-led, he also believes that the countries are followers, not leaders. Translation: Asia will recover more slowly.

Asia will have a less acute impact from the global financial and economic crisis but their recovery will also be slower than Western countries, said Morgan Stanley (Asia) chairman Dr Stephen Roach.

He said Asia’s economies, which were largely export-led, would only recover after their main export markets, the US and Europe, recovered.

“Export-led regions are followers, not leaders,” he said. “The only possibility (to recover earlier) is China, as it has large infrastructure spending in place that could provide support for economic growth.”

Roach has predicted that China will recover by the second half of this year.

He said Asia would grow below market projections this year, forecasting Asian growth at less than 2.5% and the rest of the world at between -1% and 1.5%.

Asked if China could turn its high savings into consumption, he said unless China extended its safety net for employment and social security, consumption in China would remain deficient.

Edward here. One should also note Roach’s views on stimulus and monetary policy which dovetail with what I have said — in a nutshell: fiscal stimulus good, monetary stimulus bad.

Roach also said he doubted that the use of monetary policy to boost the economy could be as effective as before.

“One of the consequences of lowering interest rates is high inflation. But my utmost concern is what the exit strategy for this aggressive easing is? How do you wind down without tipping to deflation,” he said, citing the example of Japan, where the economy had not been stimulated even with near zero interest rates.

Roach said he preferred fiscal policies, especially those which focused more on investments rather than private consumption, as he felt businesses were better credit managers than individuals.

On the US financial crisis, Roach said he blamed it on the reckless consumption, politicians and the central bank.

He said the US was only 20% through its deleveraging cycle and that the adjustments being made would take a number of years to complete.

On the US dollar, Roach said the greenback would continue as the world currency for a lot longer than many people thought, probably for a further 20 to 30 years.

You will have noticed that Roach thinks the deleveraging is only 20% complete. That means 2009 is a complete writeoff. However, when we do resume growth, excessive monetary stimulus may lead to inflation. First the deleveraging and the deflation, then the inflation. But, that’s a story for 2010-2011.

Source
Morgan Stanley chief: Asia will be less affected by crisis – The Star Online

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With the global economy in recession and inflation headed toward zero, government bonds are looking like the best place to put one’s money.  As a result, we have seen yields on these assets drop to incredibly low levels in the world’s largest developed economies as their prices have increased.

I am on record for expecting this rally in government bonds to continue due to the economic environment despite having labeled Treasuries a bubble.  Stephen Roach agrees with that assessment, which brings me to his quote:

“Rates can go to unusually low levels for much longer than people think.”

That is exactly my point regarding Treasury securities. They may show all the hallmarks of a bubble. But does that mean that the bubble will end now? That did not happen after Greenspan’s irrational exuberance quip in 1996. It didn’t happen in 2004 and 2005 when the Federal Reserve and the Bank of England were looking to stem the tide of residential property price bubbles.

Certainly there are those like Marc Faber who think Treasuries will tank.

“It’s hard to believe that after blowing up so many bubbles over the past couple years, the Fed is managing to blow yet another bubble,” he says.

“Thirty-year Treasury bonds are yielding about 2.5 percent. You would have to assume that over the next 30 years there will be no inflation problem” to make those yields attractive.

Given the expansionary fiscal and monetary policy of the United States, “there will be a time when inflation accelerates along with a weak dollar,” Faber says.

“When that happens, central banks will have to increases interest rates, which will be difficult to implement.”

You should notice that Roach and Faber have similar views on the direction of the global economy over the next five to ten years, but drastically different views as to what this means for government bonds.

While I have my money on a rise in Treasury bonds, this is not a sure thing by any stretch. If the Federal Reserve reflates the U.S. (and the global economy) through massive stimulus, you can be sure that Treasuries will be in for a very nasty correction.

Sources
Roach: No Recovery Until 2010 – Newsmax
Faber: Recession Will Last Five to 10 Years – Newsmax
Faber: Short Treasuries Massively Now – Newsmaxi

Related posts:

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Stephen Roach must feel a certain sense of Schadenfreude because he has been warning since the end of the Technology Bubble that U.S. monetary policy was reckless and would end in a very bad way. It encouraged consumption at the expense of savings and led to a massive buildup of debt. The bubble reached heights few anticipated, making Roach seem like a Cassandra for a number of years.

However, now that the bubble has burst and his economic predictions have proven right, we would be well advised to listen to him regarding fiscal policy and monetary policy solutions. As for individuals, it should be noted that Roach sees overconsumption in America as a thing of the past. He anticipated sparse crowds on Black Friday — the biggest shopping day of the year in the United States. Judging from the record crowds at malls shopping on Black Friday, it seems that it will take a much worse economic situation for Americans to give up overconsumption.

Below is the Op-Ed he wrote in today’s New York Times.

It’s game over for the American consumer. Inflation-adjusted personal consumption expenditures are on track for rare back-to-back quarterly declines in the second half of 2008 at a 3.5 percent average annual rate. There are only four other instances since 1950 when real consumer demand has fallen for two quarters in a row. This is the first occasion when declines in both quarters will have exceeded 3 percent. The current consumption plunge is without precedent in the modern era.

The good news is that lines should be short for today’s “first shopping day” of the holiday season. The bad news is more daunting: rising unemployment, weakening incomes, falling home values, a declining stock market, record household debt and a horrific credit crunch. But there is a deeper, potentially positive, meaning to all this: Consumers are now abandoning the asset-dependent spending and saving strategies they embraced during the bubbles of the past dozen years and moving back to more prudent income-based lifestyles.

This is a painful but necessary adjustment. Since the mid-1990s, vigorous growth in American consumption has consistently outstripped subpar gains in household income. This led to a steady decline in personal saving. As a share of disposable income, the personal saving rate fell from 5.7 percent in early 1995 to nearly zero from 2005 to 2007.

In the days of frothy asset markets, American consumers had no compunction about squandering their savings and spending beyond their incomes. Appreciation of assets — equity portfolios and, especially, homes — was widely thought to be more than sufficient to make up the difference. But with most asset bubbles bursting, America’s 77 million baby boomers are suddenly facing a savings-short retirement.

Worse, millions of homeowners used their residences as collateral to take out home equity loans. According to Federal Reserve calculations, net equity extractions from United States homes rose from about 3 percent of disposable personal income in 2000 to nearly 9 percent in 2006. This newfound source of purchasing power was a key prop to the American consumption binge.

As a result, household debt hit a record 133 percent of disposable personal income by the end of 2007 — an enormous leap from average debt loads of 90 percent just a decade earlier.

In an era of open-ended house price appreciation and extremely cheap credit, few doubted the wisdom of borrowing against one’s home. But in today’s climate of falling home prices, frozen credit markets, mounting layoffs and weakening incomes, that approach has backfired. It should hardly be surprising that consumption has faltered so sharply.

A decade of excess consumption pushed consumer spending in the United States up to 72 percent of gross domestic product in 2007, a record for any large economy in the modern history of the world. With such a huge portion of the economy now shrinking, a deep and protracted recession can hardly be ruled out. Consumption growth, which averaged close to 4 percent annually over the past 14 years, could slow into the 1 percent to 2 percent range for the next three to five years.

The United States needs a very different set of policies to cope with its post-bubble economy. It would be a serious mistake to enact tax cuts aimed at increasing already excessive consumption. Americans need to save. They don’t need another flat-screen TV made in China.

The Obama administration needs to encourage the sort of saving that will put consumers on sounder financial footing and free up resources that could be directed at long overdue investments in transportation infrastructure, alternative energy, education, worker training and the like. This strategy would not only create jobs but would also cut America’s dependence on foreign saving and imports. That would help reduce the current account deficit and the heavy foreign borrowing such an imbalance entails.

We don’t need to reinvent the wheel to come up with effective saving policies. The money has to come out of Americans’ paychecks. This can be either incentive driven — expanded 401(k) and I.R.A. programs — or mandatory, like increased Social Security contributions. As long as the economy stays in recession, any tax increases associated with mandatory saving initiatives should be off the table. (When times improve, however, that may be worth reconsidering.)

Fiscal policy must also be aimed at providing income support for newly unemployed middle-class workers — particularly expanded unemployment insurance and retraining programs. A critical distinction must be made between providing assistance for the innocent victims of recession and misplaced policies aimed at perpetuating an unsustainable consumption binge.

Crises are the ultimate in painful learning experiences. The United States cannot afford to squander this opportunity. Runaway consumption must now give way to a renewal of saving and investment. That’s the best hope for economic recovery and for America’s longer-term economic prosperity.

Source
Dying of Consumption – Stephen Roach, Mew York Times

Related posts:

• Savings in America hit 5%, up from nil last year
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The Financial Times caught up with two great economic pundits in Jim Grant and Stephen Roach. Below are links to six video interviews by the FT with these two gentlemen (three each). They should be enlightening regarding the global credit crisis, the U.S. bailout and financial markets and the global economy more generally.

Videos
Sep 29: STEPHEN ROACH on Asia, China and financial crisis
Sep 29: Stephen Roach on Japan propping up Wall Street
Sep 29: Stephen Roach on whether China can save the world
JAMES GRANT talks about the dangers of political intervention
James Grant talks about “shame and scandal” of financiers
James Grant talks about the $700bn bail-out plan

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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 Financial 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.

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

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