Tags: Roach | Fed | Blame | JPMorgan

Yale’s Stephen Roach: Fed Deserves Some Blame in JPMorgan Fiasco

Monday, 14 May 2012 12:40 PM

The Federal Reserve deserves some blame for the JPMorgan trading snafu currently embroiling the financial sector, says former non-executive chairman of Morgan Stanley Asia and Yale professor Stephen S. Roach.

JPMorgan revealed a $2 billion trading loss on a massive hedge operation, fueling fears other banks may be at risk.

The Federal Reserve deserves some blame, Roach says, thanks to its loose monetary policies.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Since the economic downturn, the Federal Reserve has slashed benchmark interest rates to near zero and has pumped trillions of dollars into the economy to foster investment and hiring.

The problem, Roach says, is that demand for loans isn't there, as households pay down debts and deal with unemployment and general economic uncertainty.

Weak loan demand, excess liquidity, and fiscal imbalances have created asset bubbles that create risks for such trading losses.

"You've got a pretty risky, potentially toxic cocktail there and traders have a really difficult time in managing risks in these environments," Roach tells CNBC.

"Don't absolve central banks from this. I'm not putting the blame all on the Fed but we celebrate the Fed as a great, post-crisis hero and we forget the Fed's pre-crisis role of getting us into this mess by condoning all these asset bubbles."

The Fed has suffered criticism by keeping monetary policy too expansive in the early 2000s that lead to the housing boom and bust.

Since the downturn, the Fed has purchased $2.3 trillion in bonds from banks, injecting them with liquidity as part of a monetary policy tool known as quantitative easing but dubbed by critics as printing money out of thin air.

Central banks in the U.S., Europe and in Japan have undertaken similar measures, leaving the global economy awash in liquidity.

The U.S. economy, however, remains sluggish, as the previous recession was a result of excessive borrowing and a credit collapse, which tends to see slower recoveries.

"Consumer demand is not growing. The growth rate over the last 17 quarters is 0.6 percent," Roach says.

"So we are injecting all this money into the consumer demand equation but it's not being spent because consumers want to pay down debts and rebuild savings. That's a rational and logical thing to do, so this excess money that sloshes around creates a lot of trading risks."

Meanwhile, calls for regulations won't solve the problem, but calls for better applications of existing regulations will.

"You fix it by a combination of more regulatory discipline, and we also need more monetary policy discipline, and we've got to have central banks be much more honest in managing their respective economies."

JPMorgan CEO Jamie Dimon admits the bank was sloppy in making huge hedging trades that will be difficult to unwind, but insists the bank will survive.

"We took a $2 billion loss, and we made it clear it could get worse before it gets better. I do want to put in perspective the company is going to earn a lot of money this quarter. It's a very strong company. We made a terrible, egregious mistake, and there's almost no excuse for it," Dimon tells NBC News.

The bank stops short of admitting legal wrongdoing.

"We've had audit, legal, risk and compliance — we've had our best people looking over all that," Dimon says when asked if laws were broken.

"We know we were sloppy, we know we were stupid, we know there was bad judgment. We don't know if any of that is true, yet."

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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Monday, 14 May 2012 12:40 PM
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