He spoke yesterday at the Hong Kong Investment Funds AssociationÆs annual conference, a get-together for executives in the local retail funds industry. Planned months in advance, his prepared speech was ditched in favour of a quick assessment of Tarp, announced on Sunday night (in Washington, DCÆs timezone) by Nancy Pelosi, the Democrat speaker of the House.
[Editor: this morning, Asia time, the US House of Representatives voted against the bailout package.]
RoachÆs take: a package needs to deliver the Three SÆs: speed, scale and simplicity. In terms of speed, he gives the plan an A- or B+, noting it was churned out very quickly by Washington standards. [It had been; the Republican revolt is a stunning turn against President Bush and Congressional GOP leaders - Ed.]
For scale, he gives Tarp a B- or C+, noting that $700 billion is plenty big, but Congress has decided to dole out funds in tranches, with the first pool only $250 billion. Roach doesnÆt think this is going to be welcomed by the market. He is also concerned about some of the red tape and procedures involved in prying out further tranches from Congress.
Lastly, for simplicity, he says the original three-page Paulson Plan deserved an A+, but the Congressional bill, at 110 pages over 42 sections, gets a C- or a D+. It includes four new government bureaucracies, including oversight panels, an Office of Financial Stability, an inspector and a schemes administrator. Roach calls this evidence of a ôsignificant regulatory backlashö.
ôThe best grade I can give this is a B+,ö Roach says. ôThe plan does deal with the issues, but in a sub-optimal way.ö Thus, with the fiscal strategy now set forth, attention will turn back to the Federal Reserve Bank, where governor Ben Bernanke will be under pressure to augment Tarp if market confidence doesnÆt improve.
Roach reckons that Tarp means we are more than halfway through the financial stage of the credit crisis. The real economy in the United States is only partway through. ôMost adjustments are yet to come,ö Roach warns, ôparticularly in consumption.ö
More ominously, he thinks this crisis will extend to the real economies of Asia û a process that has only just begun. ôAsian economies have been the beneficiary of the US consumption boom,ö he notes.
In 2007, the US consumer accounted for 72% of US GDP growth, thanks to bubbles in property markets, which in turn fuelled bubbles in credit (using home equity loans to borrow, for example). As Americans spend less, it will keep the US economy wobbling at very low growth for a prolonged period of time û and it will hurt Asia.
The US consumer spent $9.7 trillion in 2007, versus only $3 trillion among consumers in China and India combined û and much of that Asian wealth was based on exports. Granted, the US only accounted for perhaps 20% of those exports, but Europe and Japan are also experiencing economic declines as a result of the credit crunch, so Asian export markets worldwide are losing steam.
This threatens Chinese GDP growth rates, which have already fallen from around 12% in 2007 to an expected 10% for 2008. A further cut in exports threatens to move Chinese GDP growth to 8%. The government canÆt afford to see growth fall beyond that, so it is now cutting interest rates, loosening bank credit rules, and may introduce fiscal stimuli or act against further renminbi appreciation, Roach says.
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