After The Double Bubbles Burst
In an Op-Ed piece in the March 5, 2008 edition of The New York Times, Stephen S. Roach, the chairman of Morgan Stanley Asia, offered his thoughts on the dangers posed by the simultaneous bursting of bubbles in the housing and credit markets. Roach believes that the Federal Government’s efforts so far – lowering the lending rate and approving rebates for families and tax breaks for businesses – are unlikely to remedy the country's economic ills. The U.S. economy is not experiencing a standard cyclical downturn. It is in a post-bubble recession—the second in seven years. Roach believes that, for an asset-dependent, bubble-prone economy, a cyclical recovery is simply not guaranteed.
For six years, consumers made up for weak pay increases by withdrawing equity from their homes through cut-rate borrowing made possible by the credit bubble. As Roach wrote, “That game is now over.” Aggressive interest rate cuts have done little to contain the declining credit and capital markets. In fact, the imbalance between supply and demand for new homes may require home prices to fall an additional 20 percent to clear the market.
According to Roach, providing government aid and incentives to encourage U.S. consumers to maintain unsustainably high rates of personal consumption is a continuation of mistaken policies. It was pushing down the savings rate, fostering a huge trade deficit, and stretching consumers to take on an untenable amount of debt that got us where we are today. Roach does not think that Washington’s current efforts will “forestall the endgame of post-bubble adjustments.”
A better strategy, Roach says, is to “try to tilt the economy away from consumption and toward exports and long-needed investments in infrastructure.” He believes that the government’s emphasis should be on providing income support for those hurt by the credit crisis rather than on simply rekindling the excess spending of overextended consumers.
Roach is clearly concerned that the United States not repeat Japan’s mistakes from the 1990s. After the Japanese bubbles burst, lending was constricted for years, and Japan is still struggling. Roach would prefer that the economy avoid toxic bubbles altogether, especially since Washington appears to be oblivious to the dangers ahead.
Election years and economic crises never go well together. It is likely that few in Washington are paying attention to Roach’s attempt at a wake-up call.
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