Morgan Stanley’s Asia chairman, Stephen Roach, is returning to the U.S. after three years based in Hong Kong to embark on a career in academia starting this fall at Yale University.
Never one to shy away from controversial views, Mr. Roach sat down for the Wall Street Journal’s “Big Interview” series and shared his thoughts on global growth prospects, the China “bubble” myth, and why he wouldn’t have reconfirmed Federal Reserve Chairman Ben Bernanke. Here’s a brief summary of his remarks:
On the likelihood of a “double-dip” in the U.S.:
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?
(FT) -- Only seven of 91 European banks failed a long-awaited stress test, regulators announced last night, a result that risks undermining the credibility of an exercise designed to restore the market's confidence in the region's banking sector.
Five of the seven were cajas, Spanish savings banks, sparking nervousness that the pan-European exercise that Spain had called for might backfire.
The Bank of Spain was last night discussing what kind of contingent liquidity measures could be put in place to reassure caja customers and counter any threat of a run on these banks.
Q&A: EU stress test explained
The Committee of European Banking Supervisors said there was a capital shortfall of 3.5bn at the seven banks that failed to reach the pass mark of a 6 percent tier one capital ratio.
The test involved modelling macroeconomic and sovereign debt stresses over 2010 and 2011, applied to end-2009 capital levels.
Germany's Hypo Real Estate and Greece's ATEbank were the only non-Spanish institutions to fail.
Among the near-fails, which analysts say could come under pressure to raise capital soon, were Italy's Monte dei Paschi, on 6.2 per cent, and Germany's Postbank, on 6.6 per cent.
A handful of some of Europe's most-stretched banks announced a combined 1.3bn of capital raisings on Friday, just hours before regulators divulged the results of the test, although two of them -- National Bank of Greece and Slovenia's NLB -- both passed.
The third, Spain's Cívica, a caja that failed the test, secured 450m of convertible bond finance from JC Flowers, the US buy-out firm that has a record of investing in troubled banks.
That marked the first time a caja had sought outside capital, following a liberalisation of the law governing the public sector institutions.
Among the top-rated banks in the tests was Barclays, the UK bank whose baseline tier one ratio of 13 per cent at the end of last year rises under the stress scenario to 13.7 per cent by end-2011.
The two-month-long test exercise has been closely scrutinised by investors, with growing scepticism in the markets that the parameters of the stress scenarios were insufficiently tough.
Germany also upset the pan-European exercise at the last minute by say its banks would be disclosing the full details of sovereign debt holdings -- an adjunct to the stress tests that all banks had been expected to comply with -- only on a voluntary basis.
At least six German banks -- including Deutsche Bank, Postbank, HRE and DZ Bank -- did not publish sovereign holdings on Friday night.
"Arguably the failure here is not the banks concerned but the test itself," said Richard Cranfield, chairman of the global corporate group at Allen & Overy, the law firm.
"There is little evidence that the tests have been applied consistently and there is a distinct lack of credibility, making this a wasted opportunity.
"One assumes those banks that have failed will be rescued or recapitalised. However, the banks that have scraped through may have more of a challenge on their hands and they may be the ones the market focuses on," he said.
But European regulators hailed the results of the tests -- which they said were three times as tough as last year's US tests -- as proof of the strength of the industry.
"The US did its tests before all its banks had recapitalised," said Christian Noyer, governor of the Banque de France.
"European banks have now been through recapitalisations, restructurings, cleaning out of their portfolios. We're arriving after the battle. A few years ago it would have been different."
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