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Morgan Stanley’s Roach: US Caught In Japan-Like Downturn

Thursday, 22 Sep 2011 01:32 PM

The U.S. economy is sliding into a Japanese-style economy marked by either recession or sluggish growth, says Stephen Roach, Morgan Stanley Asia non-executive chairman.

Japan fell into recession in the late 20th Century, although excessively loose monetary policies on one hand coupled with not enough fiscal adjustments on the other kept the country adrift in economic doldrums for years.

That's happening in the U.S., and it's happening now, Roach tells CNBC.

"America is in a Japanese-like situation. That's the alternative narrative of this story that you don't hear from people like Ben Bernanke, Barack Obama and the congressmen. Clarity is good, denial is bad and the Fed is still lacking on both fronts," Roach says.

Policies are to blame, like in Japan, where authorities used easy money to fight economic maladies.

"They moved aggressively on monetary policy, and on fiscal policy nothing happened. They had a lot of what we call zombies in Japan — the walking economic dead, the banks and corporations that were basically bankrupt and kept alive by ridiculous policies by the Japanese government."

The forecast doesn't look good.

"We're certainly on the brink of a relapse, double dip, swoon — whatever you want to call it," Roach says.

Fed Chairman Ben Bernanke, who has rolled out monetary stimulus measures to prop up the economy that haven arguably failed to increase jobs but have flooded the economy with cheap dollars, doesn't deserve all of the blame.

bernanke200getty.jpg
Ben Bernanke
(Getty Images photo)
Those who ran the Fed before deserve blame as well.

"I certainly hold the Fed hugely accountable for the excesses for what led us into this crisis pre-subprime, when we had the housing bubble, the credit bubble," Roach says.

"The lesson from Japan in the balance sheet recession in the 1990s was that the economy was not responsive to extraordinary monetary easing, quantitative easing and zero interest rates. It didn't work and in the U.S. we have the same problem."

The Federal Reserve has pumped trillions of dollars into the economy by buying assets from banks, known as quantitative easing, although lending remains tight and unemployment rates high.

The monetary authority recently announced plans to sell short-term Treasury securities from its portfolio and simultaneously buy $400 billion in long-term instruments to keep interest rates low, a move dubbed Operation Twist by the markets since it twists the numbers on the yield curve around.

Many are skeptical if it will bring about lasting economic improvements.

"This buys time for the Fed but we don't think it will do much to stimulate the economy," says Douglas Borthwick, Managing Director at Faros Trading in Stamford, Connecticut, according to Reuters.

The housing market remains especially depressed, and hopes are that Operation Twist will incentivize more to borrow and buy homes.

Still, Borthwick says, many won't do so if they feel prices have room to continue falling.

"We don't expect to see an uptick in home buying, especially if people think homes will stop decline in price another 10 to 20 percent. So a drop in mortgage rates won't make much of a difference."

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The U.S. economy is sliding into a Japanese-style economy marked by either recession or sluggish growth, says Stephen Roach, Morgan Stanley Asia non-executive chairman. Japan fell into recession in the late 20th Century, although excessively loose monetary policies on one...
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Thursday, 22 Sep 2011 01:32 PM
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