Sheila Bair, Stephen Roach See Financial Crash Coming

Two notable U.S. economists- one an original “crash prophet”- are warning of a coming financial crash.

Join the club.

It’s been a while since I blogged about Yale economist Stephen Roach. From a February 27 post:

One of the handful of people to see the recent global financial crisis coming was Stephen Roach, Morgan Stanley’s chairman for Asia and chief economist, who just announced his retirement from the firm earlier this month. Roach said something very memorable back in 2004. Brett Arends wrote in the Boston Herald’s “On State Street” column on November 23, 2004:

Stephen Roach, the chief economist at investment banking giant Morgan Stanley, has a public reputation for being bearish.

But you should hear what he’s saying in private.

Roach met select groups of fund managers downtown last week, including a group at Fidelity.

His prediction: America has no better than a 10 percent chance of avoiding economic “armageddon.”’

Press were not allowed into the meetings. But the Herald has obtained a copy of Roach’s presentation. A stunned source who was at one meeting said, “it struck me how extreme he was – much more, it seemed to me, than in public.”

Roach sees a 30 percent chance of a slump soon and a 60 percent chance that “we’ll muddle through for a while and delay the eventual armageddon.”

The chance we’ll get through OK: one in 10. Maybe…

Last Friday, Roach was speaking at a conference on global risks sponsored by the Rand Corporation and Thomson Reuters in Santa Monica, California. Also attending was Sheila Bair, the former chairman of the Federal Deposit Insurance Corporation. Tim Reid wrote on Reuters website November 16:

Two leading U.S. economists expressed deep pessimism on Friday that politicians in Washington will be able to strike a deal to rein in America’s soaring national debt.

Sheila Bair, the former chairman of the Federal Deposit Insurance Corporation, and Stephen Roach, a veteran economist at Yale University’s School of Management, also said the Federal Reserve was creating another catastrophic financial bubble with attempts to stimulate the economy through its policy known as quantitative easing…

Bair, who stepped down as head of the FDIC in July 2011, said the Federal Reserve’s policy of pumping money into the economy, combined with an unprecedented period of historically low interest rates, was creating “the mother of all bond bubbles.”

Bair said she believed the United States was heading for a financial crash on the scale seen when the housing market collapsed six years ago, but this time because of investors who were looking for higher and riskier returns in other asset classes.

(Editor’s note: Italics added for emphasis)

I don’t recall Ms. Bair being so vocal about such things when she was FDIC Chairman. Now she can speak her mind as she’s no longer in that position, right?

Reid added:

Roach called the Federal Reserve policy of low interest rates and quantitative easing a “ticking time bomb that keeps on ticking.”

Both economists think the so-called “fiscal cliff” will be avoided by Congress electing to punt on fiscal responsibility.

As do I. Which will only make the coming pain even worse as the nation’s debt keeps piling up.

Source:

Reid, Tim. “U.S. heading for another crash, debt crisis looms: top economists.” Reuters. 16 Nov. 2012. (http://www.reuters.com/article/2012/11/16/us-usa-debt-rand-idUSBRE8AF1EF20121116). 16 Nov. 2012.