Stephen Roach – protectionism a threat

January 28, 2009

Stephen Roach of Morgan Stanley, who pretty much called it at last year’s Davos, when consensus was for no recession in the “real” economy and decoupling of emerging markets, is gloomy again. Speaking with him this morning after he did an interview with Reuters on Davos Today, Roach said that there was a real threat of protectionism as politicians come under pressure from rising unemployment. The U.S. and China relationship will be key, he said.

On U.S. real estate – a continuing issue for banks and the economy:

“The interplay between the property and financial sectors has been ground zero of this crisis.

The problem was the banks played the property bubble just like consumers did and so we are all in this together.”

Not a big fan of equities, it seems:-

“Equities have pretty much discounted a dire outlook for 2009. The problem with equities as an asset class is that they are pretty much based on optimistic earning expectations for 2010 and 2011. We will challenge those expectations this year. I’d be pretty cautious before committing new funds to the equity market in this climate.

So what is Blackstone Group chairman Stephen Schwarzman’s prescription for solving the banking crisis?

More leverage and less transparency, apparently.

Schwarzman told a panel at Davos that you can’t mandate higher levels of bank capital at the same time losses are mounting and that mark-to-market accounting needed to be changed.

“You need lower capital. Do something with fair value accounting which is exacerbating things . . . We have to add more leverage to the system.” He further took issue with what he described as a “fixation on transparency” and said “We have to use regulators to schedule out losses.” By that I presume he means keep the bank on life support until they can make enough to absorb their losses. It did work in the 1990s with some prominent U.S. banks, but…

Laura Tyson, an economic advisor to the Obama administration, didn’t seem to be buying in to the more leverage less disclosure meme.

“Nobody trusts the private system, why should they trust them?” she said. She also mentioned the Swedish solution, which you may remember imposed some pretty tough conditions on bank shareholders. She said that voters would be watching who made money out of bailouts and would be concerned by “compensation and dividends.”

James Saft is a Reuters columnist. The opinions expressed are his own.

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