Consumer Consumption May Not Be the Answer to Nation’s Economic Woes
It’s a familiar strategy: The federal government has lowered lending rates, given tax breaks to businesses and approved tax rebates for families to stimulate consumer spending and improve the U.S. economy. But according to Stephen S. Roach, chairman of Morgan Stanley Asia, it’s not going to work this time.
In the past six years, consumers who got incremental pay raises compensated by borrowing against the equity in their home at the low rates offered in the credit bubble. But, “That game is now over,†wrote Roach in an op-ed piece for the March 5 edition of The New York Times.
Even today’s aggressive rate cuts can’t offset the steep decline in the credit and capital markets. Moreover, such a wide gap exists between the supply of new homes and demand that we may see prices may drop another 20 percent before the market clears.
Roach believes encouraging continued consumption at this level is a mistake. This policy, fed by government aid and incentives, already has caused consumers to save far less and borrow much more than they can afford to repay. Rather than trying to motivate additional spending, Roach said, the government should give some type of income support to people who already have been hurt, and emphasize exports and investments in infrastructure to stop the trade deficit from widening further.
Obviously, Roach is one of many experts who are concerned about the double-bubble burst in the housing and credit markets. He recalled that Japan is still struggling to recover after simultaneous bubble bursts in the 1990s.
Meanwhile, as Washington seems unable or unwilling to recognize that the country is in its second post-bubble recession in seven years, Roach doesn’t have much hope that the country will avoid painful post-bubble adjustments.
And since economic crises and elections don’t go well together, it’s unlikely anyone in Washington will heed his warning.
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses.
