Roach v. Bernanke

Stephen Roach, the longtime chief economist and now Asia head of the investment bank Morgan Stanley has grave concerns about Fed Chairman Ben Bernanke’s just-announced term extension

In a commentary for Britain’s Financial Times, Roach, who for years was the only Wall Street economist to warn sharply of an approaching crisis (A Bad Omen), called Barak Obama’s nomination of Bernanke for another term "a very short-sighted decision". Although Bernanke had been quite preserved during the crisis, one should not forget the contribution Bernanke had made to the emergence of the crisis: "It is like praising a proven quack for the invention of a miracle cure."

Bernanke is responsible for three critical errors, the most serious of which is that he, like his predecessor Alan Greenspan, held the "philosophical conviction" that central banks should ignore speculative bubbles. According to this doctrine, the task of the central bank in this respect is exclusively to break up the bubble after it has burst. After the bursting of the New Economy bubble in 2000, the cleanup consisted of flooding the financial markets with liquidity from 2001 to 2003, which contributed significantly to the "deadly mix of credit and real estate bubbles.

Bernanke was also the main proponent of the so-called "global saving glut" thesis, according to which Asia’s excessive savings were responsible for macroeconomic imbalances. Since there were no similarly attractive investment opportunities elsewhere, these were invested in the USA, which formally forced the USA into excessive debt.

Ultimately, according to Roach, Bernanke was "knitted from the same free-market liberal cloth that got the Fed into this predicament in the first place". Like Greenspan, he believed that the markets knew better than the regulators and should be left alone: "The explosion of derivatives, the extreme leverage of the official and shadow banking systems, and the excesses in real estate lending were all abuses that the Fed could have intervened against. But it did not."

These flaws aside, it is also a bit premature to celebrate Bernanke for overcoming the crisis at this early stage. Because so far, no one can know whether Bernanke will ultimately succeed: "While the worst of the U.S. recession seems to have stopped for now" – which for Roach is "a fairly typical, but temporary effect of the current inventory cycle. But the "sustainability of a post-bubble upswing is always doubtful," a fact about which one need only ask Japan 20 years after the bursting of the bubbles there.

Thus, while financial markets were already "giddy with hope" again in the face of economic recovery, there were good reasons to expect an "anamic and fragile" recovery. Because: "While consumers must first rebuild their pension provisions, no rescue can be expected from exports either, due to the synchronized global slump."Consequently, it would be the "height of madness to reward Bernanke now for a recovery that will never happen". He had reacted well in the crisis, but before that he had lacked the foresight to curb the obvious excesses. Roach’s conclusion: "The world needs central bankers who avoid problems, not those who specialize in picking up after the crisis"."