This Monetary Policy to Cause a New Crisis

Contrary to the view of many, the Great Crisis didn’t have to happen. I reject the excuse offered by many of the apologists that it was a once-in-a-century tsunami that would have occurred in any case – that policy makers could have done little to forestall the outcome. Yet nothing could be further from the truth. Defensive and steeped in denial, policy makers are ducking responsibility.

The recent crisis is a painfully visible manifestation of the greatest failure of central banking since the 1930s. Out of basis points, relying on dubious quantitative easing strategies, and still agnostic when it comes to coping with asset and credit bubbles, monetary policy has  become the weak link in the daisy chain. Yet in the rush to re-regulate, central banks have largely been let off the hook. Nor are ever-profligate fiscal authorities exactly a beacon of hope in this crisis battered world.

Out of the darkness of the 1930s, a new approach to fiscal and monetary policy was borne. That renaissance is now over. The Great Crisis of 2008-09 demands a rethinking of the strategy and tactics of orthodox stabilization policies. Glaring shortcomings in our policy  architecture must be addressed if the world is ever to learn the most important Lessons of Japan. As day follows night, a failure to learn these lessons almost guarantees another crisis in the not-so-distant future.

"I fear that unless regulatory reform is accompanied by a rethinking of monetary policy, another crisis is far more likely than not."

 Stephen Roach, CEO, Morgan Stanley Asia

Stephen Roach: Fed Making Same Mistakes Again!

The Federal Reserve is running the risk of replaying the disaster movie that led to the credit crisis by keeping monetary policy loose for too long, Stephen Roach, non-executive chairman at Morgan Stanley, told CNBC Tuesday.

Despite the central bank's efforts to juice the economy, a double-dip recession looms, he said.

 "This is a replay of exactly what the Fed did, but with different stakes, following the bursting of the equity bubble in early in 2000. They stayed easy for an extended period, gave us monster bubbles in property and credit. Those caused the crisis, and now they're playing the movie back again," Roach said.
Roach said the Fed's mandate should be expanded to include financial stability and the central bank should have a much more strategic outlook and be more transparent.

If it doesn't, it could risk sowing the seeds of another round of asset bubbles, he said.

"We have a reactive Fed, they're always being driven by the latest problem in the economy," he added. "They've gotten themselves into a big, big hole and they don't know how to get out of it."

Even though Roach thinks that U.S. monetary policy is too loose, he also said the economy is still spluttering and describes himself as being in the "double-dip camp."

"The case for a double dip is not a complex case; it starts with a weak recovery… You don't have the staying power to avoid a relapse," he said.

Because of the weakness in the economy, Roach said the Fed should not tighten, but rather be more open about its exit strategy and focus on the risk of asset bubbles.

"This is not the time for an aggressive Fed tightening, but it is the time for the Fed to stand back (and be more strategic)," he added.

The Fed is divided over its recent policy decision to buy Treasury notes with the proceeds from its mortgage securities maturing, according to a report in the Wall Street Journal.

Roach said the dissent is likely and justified, but also said that there is a desire within the rate-setting organization to stand behind Fed Chairman Ben Bernanke.

"Visible Manifestation of All The Excess Liquidity"

So that's what all this is! "This is a very visible manifestation of all the excess liquidity that monetary authorities have poured into the system... seeking return." Stephen Roach, Chief Economist, Chairman, Morgan Stanley Asia. In other words, we're blowing more bubbles!