WEBVTT - Interview With Stephen Roach: Masters in Business (Audio) 0:00:03.240 --> 0:00:07.600 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:08.080 --> 0:00:12.039 Today on the podcast, I have Stephen Roach, and I 0:00:12.560 --> 0:00:15.920 can't begin to tell you what a master class in 0:00:16.000 --> 0:00:21.040 both economics and investing this was. You should be familiar 0:00:21.079 --> 0:00:24.480 with Roach. He was the chief economist at Morgan Stanley 0:00:24.520 --> 0:00:27.000 for twenty one years. He was there for over three 0:00:27.040 --> 0:00:30.800 decades before he moved on to becoming chairman of Morgan 0:00:30.880 --> 0:00:36.720 Stanley Asia. This was just an tour to force discussion 0:00:36.960 --> 0:00:40.879 on everything from the role of Federal Reserve to the 0:00:40.920 --> 0:00:46.319 way we measure productivity, to how markets should impact you're 0:00:46.320 --> 0:00:52.960 thinking about everything from economics to valuation and investing. Uh. Absolutely, Uh, 0:00:54.080 --> 0:00:57.560 I can't say enough. I'm gushing. I expect you're going 0:00:57.600 --> 0:01:00.880 to find this to be just uh ninety minutes that 0:01:00.920 --> 0:01:04.440 are gonna fly by. So rather than have me continue 0:01:04.480 --> 0:01:07.199 to babble, let me just jump right into it without 0:01:07.200 --> 0:01:12.200 any further ado. Our conversation with Yale and Morgan Stanley's 0:01:12.360 --> 0:01:19.360 Steven Roach. This is Masters in Business with Barry Ridholts 0:01:19.560 --> 0:01:23.920 on Bloomberg Radio. My special guest today is Stephen Roach. 0:01:24.400 --> 0:01:27.160 You probably know him from his years as the chief 0:01:27.160 --> 0:01:32.319 economist for Morgan Stanley. A quick background on on Mr Roach, 0:01:32.360 --> 0:01:35.199 Professor Roach, Dr Roach, Can I call you Dr Roach? 0:01:35.400 --> 0:01:38.920 Calling anything you want? Barry? Alrighty and um. He began 0:01:38.959 --> 0:01:41.839 his career as a research fellow at the Brookings Institute 0:01:42.240 --> 0:01:45.679 before becoming a researcher for the Federal Reserve, where he 0:01:45.720 --> 0:01:49.400 worked for seven years. Uh. Not only was he chief 0:01:49.400 --> 0:01:52.360 economist at Morgan Stanley, he eventually rose to the title 0:01:52.800 --> 0:01:57.120 of Chairman Morgan Stanley Asia, where he was for five years. 0:01:58.040 --> 0:02:03.000 He's written a number of books, Unbalanced, Codependency of America 0:02:03.080 --> 0:02:07.160 and China, as well as The Next Asia, Opportunities and 0:02:07.240 --> 0:02:11.400 Challenges for a New Globalization. He is presently a senior 0:02:11.520 --> 0:02:14.840 lecturer at the Yale School of Management and a Senior 0:02:14.880 --> 0:02:19.680 fellow at Yale's Jackson Institute for Global Affairs. Stephen Roach, 0:02:19.760 --> 0:02:23.000 Welcome to Bloomberg. Pleasure to be so. I was excited 0:02:23.040 --> 0:02:25.760 to talk to you for so many reasons. Your your 0:02:25.840 --> 0:02:31.480 background is tremendous, and you were at Morgan Stanley for 0:02:31.680 --> 0:02:36.079 thirty years, including a huge swath of that as the 0:02:36.160 --> 0:02:40.280 chief economist, and you worked with a number of legendary 0:02:40.360 --> 0:02:44.079 people before becoming a legend yourself. You worked with Byron 0:02:44.120 --> 0:02:48.200 Ween as well as Barton Biggs. What was it like 0:02:48.720 --> 0:02:52.560 during that era, Actually, Barry, you know, those are the 0:02:53.000 --> 0:02:56.400 as far as I'm concerned, that was the golden age 0:02:56.600 --> 0:03:02.120 of Wall Street macro research. Uh. We really had an 0:03:02.120 --> 0:03:06.880 extraordinary period, not just in the economy and in the markets, 0:03:07.560 --> 0:03:11.680 but in building UM. Morgan Stanley I think into the 0:03:11.800 --> 0:03:17.400 pre eminent leader in um sort of macro analysis of 0:03:17.520 --> 0:03:22.320 markets and economies, and Byron Barton and I sort of 0:03:22.360 --> 0:03:26.959 spearheaded that they did it from the market strategy point 0:03:26.960 --> 0:03:30.200 of view, um, I did it from the economics point 0:03:30.240 --> 0:03:34.960 of view. Barton of course, straddled both the market and 0:03:35.280 --> 0:03:38.800 the economic realm because he always had some really uh 0:03:39.040 --> 0:03:43.320 uh you know, quite penetrating and deep insights into the 0:03:44.160 --> 0:03:49.680 macro underpinnings of the markets that he was following. And um, 0:03:49.720 --> 0:03:52.280 you know, and Byron had his own knack of looking 0:03:52.360 --> 0:03:55.880 at the market through the lens of his out of 0:03:55.920 --> 0:03:59.400 consensus ten surprises, and and and we we all worked 0:03:59.480 --> 0:04:02.920 very very closely together. We traveled the world together. We 0:04:02.960 --> 0:04:06.520 provoked each other, we debated each other. Um. Every once 0:04:06.520 --> 0:04:09.240 in a while, we even agreed with each other. Uh, 0:04:09.520 --> 0:04:11.400 but most of all we had fun. Uh. It was 0:04:11.520 --> 0:04:13.960 an extraordinary period. The bulk of this period was the 0:04:14.080 --> 0:04:16.840 nineteen eighties and nineteen nineties. It was a huge boom 0:04:16.880 --> 0:04:20.240 going on both in the bond market and the stock market. 0:04:20.720 --> 0:04:24.960 How does that era of prosperity impact the growth of 0:04:24.960 --> 0:04:28.839 a firm, a little unknown firm like Morgan Stanley. Well, 0:04:28.880 --> 0:04:32.360 you know, Morgan Stanley was historically, you know, mainly an 0:04:32.360 --> 0:04:36.839 investment banking firm that you know, in the nineteen seventies 0:04:36.920 --> 0:04:41.280 made a commitment to really uh go into a broad 0:04:41.360 --> 0:04:49.800 based institutional origination and distribution business, adding equities, um, then 0:04:50.400 --> 0:04:55.040 when I came in the early eighties, adding government securities, 0:04:55.080 --> 0:04:58.200 becoming a primary dealer, and then really starting to build 0:04:58.200 --> 0:05:04.120 out a uh a full blown a fixed income uh business. 0:05:04.120 --> 0:05:07.720 And so Morgan Stanley wanted to ride the wave of 0:05:07.760 --> 0:05:14.000 the institutionalization and the internationalization of the global securities business. 0:05:14.040 --> 0:05:17.039 And really, I think was one of the first firms 0:05:17.040 --> 0:05:22.719 to successfully transition transform itself from a narrow, pre eminent 0:05:22.800 --> 0:05:26.400 investment bank into a broad based international securities firm. So, 0:05:26.560 --> 0:05:32.240 given how everything has become so balkanized, you have boutiques rising, 0:05:32.320 --> 0:05:35.080 you have hedge funds and private equity and venture capital, 0:05:35.480 --> 0:05:38.120 would it be possible in the modern era for that 0:05:38.279 --> 0:05:42.719 same story to take place. Could another Morgan Stanley rise 0:05:43.080 --> 0:05:45.560 or is that just a bygone era and we're not 0:05:45.600 --> 0:05:48.839 going to see that sort of huge conglomerate coming to 0:05:48.880 --> 0:05:52.920 the fore again. It's hard to say. I mean, you know, 0:05:53.000 --> 0:05:57.479 the environment has changed from a macroeconomic perspective. I mean, 0:05:58.120 --> 0:06:01.239 back in the late seventies early eighties, when this whole 0:06:02.040 --> 0:06:04.840 magic began, you know, we had double digit inflation, double 0:06:04.880 --> 0:06:07.599 digit interest rates, and and once we put policies in 0:06:07.640 --> 0:06:11.120 place to address that, then you know, we we began 0:06:11.200 --> 0:06:16.400 a you know, extraordinary twenty five year ballmarket with interest 0:06:16.480 --> 0:06:20.600 rates going one way. That journey is complete, and now 0:06:20.760 --> 0:06:22.320 you know, there's a big debate as to whether or not, 0:06:22.800 --> 0:06:24.880 you know, it's gonna go the other way. I'm suspicious 0:06:24.920 --> 0:06:27.279 of that. But to to get that kind of break 0:06:27.320 --> 0:06:30.480 from the markets, and then to get the same type 0:06:30.480 --> 0:06:35.400 of break from the globalization of of of cross border 0:06:35.440 --> 0:06:40.080 capital flows and the development of a whole new complex 0:06:40.120 --> 0:06:43.960 of of products that are addressed to uh uh, to 0:06:44.080 --> 0:06:47.960 deal with these twin forces of disinflation and globalization, I 0:06:48.200 --> 0:06:50.840 don't think you can recapture that. But that doesn't mean 0:06:51.279 --> 0:06:55.080 some other combination. Couldn't UH, you know, come up and 0:06:55.080 --> 0:06:59.359 and and offer a different business model that UM is 0:06:59.400 --> 0:07:01.960 potentially just as attractive as the one that Morgan Stanley 0:07:02.000 --> 0:07:06.800 presented in our early nine You're listening to Masters in 0:07:06.839 --> 0:07:10.440 Business on Bloomberg Radio. My special guest today Yale lecturer 0:07:10.560 --> 0:07:14.720 and former Morgan Stanley chief economist Stephen Roach, and we 0:07:14.720 --> 0:07:17.200 were just talking about UH, the f O m C 0:07:17.480 --> 0:07:21.000 and the most recent UH end of zero interest rate 0:07:21.040 --> 0:07:23.200 policy in the beginning of what some people have been 0:07:23.240 --> 0:07:27.720 calling lift off. Let me let me ask a very 0:07:27.720 --> 0:07:31.720 broad question. So unemployment since the crisis has been cut 0:07:31.720 --> 0:07:33.880 in half. We were ten percent, were now more or 0:07:33.960 --> 0:07:37.160 less at five percent. C p I is barely two. 0:07:38.160 --> 0:07:43.320 So the question is what have the FED been waiting for? Well, 0:07:43.360 --> 0:07:46.320 the Fed, I think harbor is the mistaken belief that 0:07:46.640 --> 0:07:52.680 UM UH monetary policy, whether it's traditional using UM their 0:07:52.720 --> 0:07:57.320 federal funds rate or non traditional using quantitative easing, holds 0:07:57.360 --> 0:08:00.600 the key to economic recovery whole is the key to 0:08:00.640 --> 0:08:06.280 controlling inflation, holds the key to controlling UH risk taking 0:08:06.400 --> 0:08:11.760 and and and driving global economic activity. I think UM, 0:08:11.800 --> 0:08:16.880 you know, a lot of those assumptions probably are close 0:08:16.960 --> 0:08:19.440 to being right, but just as many, if not more, 0:08:19.480 --> 0:08:22.080 of them are are really wrong. So let me push 0:08:22.120 --> 0:08:25.320 back on you on that a little bit, because between 0:08:25.720 --> 0:08:28.800 Ben Bernanke's The Courage to Act is his recent book 0:08:29.320 --> 0:08:32.520 and the circuit he's been doing talking about it. One 0:08:32.520 --> 0:08:35.280 of the things he has said is we didn't want 0:08:35.280 --> 0:08:38.400 to be as aggressive as we were, but we had 0:08:38.480 --> 0:08:43.640 no choice since Congress was paralyzed, there was an austerity movement, 0:08:43.720 --> 0:08:49.040 and the traditional post recession Kinzie stimulus was not available. 0:08:49.640 --> 0:08:51.800 Do you buy that or what do he's You know, 0:08:51.920 --> 0:08:55.880 he's talking his book literally and figured figuratively. Yes, um. 0:08:56.600 --> 0:09:00.800 And you know he has an uncanny knack for starting 0:09:00.840 --> 0:09:06.559 history when it's most convenient for him to explain, um uh, 0:09:06.600 --> 0:09:12.080 the efficacy of the Federal Reserves Rescue Act during the crisis. 0:09:12.480 --> 0:09:16.760 What he fails to really own up to in Greenspan 0:09:16.920 --> 0:09:19.160 is the same way is the critical role of FED 0:09:19.240 --> 0:09:23.000 played in getting us into this mess. Um. I commend 0:09:23.000 --> 0:09:26.559 Ben Bernanky for his heroic actions in the depth of 0:09:26.600 --> 0:09:31.000 a crisis, but by advocating a monetary policy that was 0:09:31.080 --> 0:09:36.160 extraordinarily easy um and the pre crisis years, by steadfastly 0:09:36.200 --> 0:09:39.360 maintaining as an academic and then as a central banker 0:09:39.840 --> 0:09:43.800 that monetary policy should play no role whatsoever in containing 0:09:43.920 --> 0:09:46.840 or controlling asset or credit bubbles. I think he let 0:09:46.920 --> 0:09:49.680 us down a path that almost blew up the system. 0:09:49.679 --> 0:09:52.319 And so what I want from a central banker is 0:09:52.360 --> 0:09:56.160 a much more disciplined approach to focusing on financial stability 0:09:56.559 --> 0:09:59.400 rather than just targeting an inflation rate which never seems 0:09:59.400 --> 0:10:03.800 to budget, which it's consistently below the FEDS expectations and 0:10:03.880 --> 0:10:06.560 has been so for close to eight years now. So 0:10:07.280 --> 0:10:10.720 you mentioned green Span. Let's let's talk about the central 0:10:10.760 --> 0:10:14.640 banker formerly known as the Maestro. His reputation took a 0:10:14.720 --> 0:10:19.640 giant hit following the crisis, deservedly so or not? Yeah, 0:10:19.679 --> 0:10:23.400 absolutely so? I think, um again, he he was sort 0:10:23.440 --> 0:10:26.520 of a uh, you know, had a one way view 0:10:26.840 --> 0:10:30.280 of market disruptions. The so called green Span put whenever 0:10:30.320 --> 0:10:33.480 the market's got into trouble, just you know, um, turn 0:10:33.520 --> 0:10:36.560 on the fire hose and and inject more liquidity and 0:10:36.640 --> 0:10:38.559 let it slash around and the system will take care 0:10:38.559 --> 0:10:42.640 of itself. And that works brilliantly until one day it doesn't. Uh, 0:10:42.640 --> 0:10:46.720 And that doesn't was when um, you know, there was 0:10:46.760 --> 0:10:50.400 this catastrophic near collapse of the system in the fall 0:10:50.559 --> 0:10:56.600 of sparked by Lehman Brothers. Green Span never believed that 0:10:56.640 --> 0:11:01.160 we could have uh systemic risk coming from any bubble, 0:11:01.160 --> 0:11:03.679 while it was a dot com bubble, whether it was 0:11:03.720 --> 0:11:07.360 the housing bubble, whether it was a credit bubble. He 0:11:07.440 --> 0:11:11.040 all believed that these were testaments to the oh, you know, 0:11:11.120 --> 0:11:15.520 the brilliance of you know, the market based system, consistent 0:11:15.600 --> 0:11:21.199 with his uh you know uh and rand libertarian view 0:11:21.320 --> 0:11:24.080 of the world that markets always no best in central 0:11:24.120 --> 0:11:27.560 banks should never interfere with the wisdom and brilliance of markets, 0:11:27.720 --> 0:11:30.200 Which is sort of bizarre because I just want to 0:11:30.200 --> 0:11:34.719 clarify something. So two thousand eight Lehman brother Long Term 0:11:34.760 --> 0:11:40.679 Capital Management. Um. The fascinating thing about Greenspan is here's 0:11:40.679 --> 0:11:44.200 a guy who who is proselytizing, let the market sorted 0:11:44.240 --> 0:11:47.720 out hands for off limit the amount of regulation we had. 0:11:48.080 --> 0:11:50.360 Yet every time there was a twitch, he was there 0:11:50.400 --> 0:11:55.560 too intervene in the markets. It seems somewhat um hypocritical. 0:11:56.840 --> 0:12:01.040 Well that I think hypocriticals putting it too kindly. I 0:12:01.080 --> 0:12:03.120 think I think I was afraid you're gonna say that's 0:12:03.120 --> 0:12:05.360 too strong in the world. No, I think I think that, 0:12:05.679 --> 0:12:09.600 um what what the FED didn't And I don't want 0:12:09.600 --> 0:12:13.480 to single out Alan Greenspan, because we had a system 0:12:13.480 --> 0:12:17.320 Barry that would have created another Alan Greenspan, if if if, 0:12:17.360 --> 0:12:22.480 if he wasn't around. We were struggling with economic growth 0:12:23.400 --> 0:12:27.479 as a nation. Uh really beginning in the nineteen seventies. 0:12:28.200 --> 0:12:31.680 Uh and um then we had you know, devastating high inflation. 0:12:31.760 --> 0:12:35.600 Paul Provoker came in and and really broke the back 0:12:35.600 --> 0:12:38.439 of that inflation. But you know, the economy was still 0:12:38.840 --> 0:12:42.520 laboring under a lot of pressures, especially in its ability 0:12:42.520 --> 0:12:46.720 to generate income for average American or middle class workers. 0:12:46.840 --> 0:12:49.800 And so the Central Bank, under the guidance of Alan 0:12:49.840 --> 0:12:53.760 Greenspan for eighteen and a half years, relied much more 0:12:53.880 --> 0:12:57.760 on financial engineering to create asset bubbles to generate so 0:12:57.800 --> 0:13:01.040 called extra purchasing power to grow the economy beyond the 0:13:01.080 --> 0:13:04.959 fundamentals of the earnings that we were able to squeeze 0:13:05.480 --> 0:13:10.679 out of hard work UM and productivity related pay increases. 0:13:10.679 --> 0:13:16.959 And this disconnect between the UM, the underlying income generation 0:13:17.000 --> 0:13:20.600 that comes from employment, and the income that could be 0:13:20.640 --> 0:13:24.360 extracted from asset and credit bubbles let us down, I 0:13:24.360 --> 0:13:27.160 think a very treacherous path and you know, I think 0:13:27.200 --> 0:13:31.400 that's the the dilima that Janet Yelling faces today is 0:13:31.720 --> 0:13:36.200 how to uh put the economy back on a sounder basis, 0:13:36.200 --> 0:13:41.600 more supported by the fundamentals of wage on labor income 0:13:41.640 --> 0:13:45.240 generation than by the excesses of asset appreciation. So so, 0:13:45.280 --> 0:13:47.680 we had the dot com bubble in two thousand, we 0:13:47.760 --> 0:13:51.040 had the housing and credit bubble in oh five, oh six, 0:13:51.080 --> 0:13:54.920 we had a subsequent commodities boom and bust. Are we 0:13:55.040 --> 0:13:58.280 in uh we at risk at another bubble now? Or 0:13:58.480 --> 0:14:02.440 things on the right track? And part of that comes 0:14:02.440 --> 0:14:05.640 from the slope to to and a half percent growth now? 0:14:05.720 --> 0:14:09.560 I like, I think that um uh, there's there there's 0:14:09.640 --> 0:14:12.640 risks that we're gonna end up with another type of 0:14:13.640 --> 0:14:18.400 financial accident. Uh. We you know, we're still at a period, 0:14:18.559 --> 0:14:23.360 historically unprecedented period of rock bottom interest rates. I mean, 0:14:23.400 --> 0:14:25.480 you know, big deal. You know, the federal funds rights 0:14:25.480 --> 0:14:29.560 now at basis points. But not only have we taken 0:14:29.600 --> 0:14:33.120 interest rates to the so called zero bound, uh, and 0:14:33.200 --> 0:14:35.240 not just in the US, but in you know, Europe, 0:14:35.800 --> 0:14:39.320 uh and in Japan. But the balance sheets of central 0:14:39.320 --> 0:14:41.920 banks are so swollen that there continues to be a 0:14:41.920 --> 0:14:45.040 lot of excess liquidity slashing around the world, and that's 0:14:45.040 --> 0:14:48.680 where the risk lies in terms of the next potential crisis. 0:14:49.040 --> 0:14:51.920 You're listening to Masters in Business on Bloomberg Radio. My 0:14:52.040 --> 0:14:54.920 special guest today is Stephen Roach. He was the chief 0:14:54.960 --> 0:14:58.000 economist at Morgan Stanley, where he toiled for more than 0:14:58.040 --> 0:15:01.800 thirty years before becoming Amen of Morgan Stanley Asia. He 0:15:01.960 --> 0:15:06.160 is currently a lecturer at Yale University. And earlier we 0:15:06.160 --> 0:15:08.720 were talking about the impact of the FED and some 0:15:08.840 --> 0:15:13.280 of the bigger mistakes that Alan Greenspan and other FED 0:15:14.040 --> 0:15:18.400 members had made. Why is it, I'll start you out 0:15:18.400 --> 0:15:21.040 with a big one. Why is it that the FED 0:15:21.640 --> 0:15:26.120 specifically and most of the world's economists missed that big 0:15:26.160 --> 0:15:28.840 crisis in O eight oh nine? How come no one 0:15:28.920 --> 0:15:33.440 really saw it coming in advance? Well, I think, uh, 0:15:33.480 --> 0:15:35.720 it's it's it's like an how come investors, you know, 0:15:35.800 --> 0:15:41.440 don't see bear markets when when a trend is spectacularly 0:15:41.600 --> 0:15:46.120 in favor of your position, whether it's an investor or 0:15:46.160 --> 0:15:49.960 a policymaker, you know, you don't want to ever shall 0:15:50.080 --> 0:15:52.000 be the one who shouts there's a fire in the room. 0:15:52.040 --> 0:15:57.720 You overstay, You're welcome. The Federal Reserve uh, was was 0:15:57.800 --> 0:16:02.520 steeped in the hubris of what it loudly proclaimed as 0:16:02.560 --> 0:16:07.000 the Great Moderation. They had cracked the back of inflation. 0:16:07.040 --> 0:16:11.280 They had gotten the economy to perform very well. Unemployment 0:16:11.440 --> 0:16:15.880 was low, and sure, you know, asset markets were frothy 0:16:15.880 --> 0:16:18.880 in their view, but this wasn't a big, big risk 0:16:18.920 --> 0:16:21.240 after all of green Spain argued, we can't have a 0:16:21.320 --> 0:16:23.960 nationwide housing bubble. We could have problems in Las Vegas 0:16:24.040 --> 0:16:26.440 or Florida, but not for the country as a whole. 0:16:26.840 --> 0:16:31.240 We can't have a dot com bubble, he argued earlier. 0:16:31.280 --> 0:16:33.000 I mean, after all, these are new companies that are 0:16:33.000 --> 0:16:36.960 gonna drive us to a new frontier on productivity. And 0:16:37.040 --> 0:16:40.120 let's not be critical of some prime mortgages, he argued, 0:16:40.160 --> 0:16:43.120 because that's providing housing finance to a swath of the 0:16:43.160 --> 0:16:47.040 population that needed shelter. And so, you know, it went 0:16:47.120 --> 0:16:50.800 on and on on. The music just kept playing. Uh 0:16:50.880 --> 0:16:54.400 and um. Nobody wanted to be left holding the bag 0:16:54.520 --> 0:16:57.840 until they realized suddenly that maybe it wasn't quite as 0:16:57.920 --> 0:17:01.280 pretty as they thought, and it was too late by then. Bury. 0:17:01.440 --> 0:17:04.159 Let me push back a little bit, because we know 0:17:04.240 --> 0:17:08.520 that investors from a psychological standpoint, they have a vested 0:17:08.560 --> 0:17:12.520 interest in bull markets continuing, and they always overstay their 0:17:12.560 --> 0:17:15.000 welcome and they never want to believe that markets go 0:17:15.560 --> 0:17:19.000 up and down. But the FED are supposed to be 0:17:19.040 --> 0:17:23.600 the professional watchmen who are there for, amongst other things, 0:17:23.880 --> 0:17:27.920 to look for these aberrations and to identify when policy 0:17:28.040 --> 0:17:29.840 is too loose or too tighten is going to cause 0:17:29.880 --> 0:17:33.280 a problem for the FED to behave Like any mom 0:17:33.280 --> 0:17:38.000 and pop investor who makes bad decisions based on a 0:17:38.080 --> 0:17:42.080 variety of behavioral eras, seems like they really weren't doing 0:17:42.119 --> 0:17:45.480 what they were supposed to do. Well, you know, I 0:17:45.480 --> 0:17:48.680 hate to uh uh disagree with you on that, but 0:17:48.680 --> 0:17:51.919 but I think I think we ended up. Despite the 0:17:51.960 --> 0:17:55.439 fact that we extol the virtues of the FED as 0:17:55.480 --> 0:17:59.119 being politically independent, they're not politically independent. They're part of 0:17:59.119 --> 0:18:02.880 the body polyp that wants to squeeze more growth out 0:18:02.880 --> 0:18:04.600 of the system than the system can deliver on the 0:18:04.600 --> 0:18:07.600 basis of fundamentals. And so you know, if you read 0:18:07.840 --> 0:18:11.119 that alone, seems very reckless. Well, basically, it's like driving 0:18:11.119 --> 0:18:13.400 a car that shouldn't go more than a hundred miles 0:18:13.359 --> 0:18:15.239 an hour. At a hundred and fifty you're gonna run 0:18:15.280 --> 0:18:17.720 into drug They were part of the Washington consensus that 0:18:18.040 --> 0:18:25.040 really was disturbed by the lack of fundamentally supported economic growth. 0:18:25.520 --> 0:18:28.359 So if a central bank could deliver growth beyond the 0:18:28.400 --> 0:18:33.800 fundamentals by excess liquidity, low interest rates, asset and credit bubbles, 0:18:34.560 --> 0:18:38.199 who who who was the Congress to be critical of that? 0:18:38.280 --> 0:18:43.080 And Greenspan ultimately ended up, you know, in his UH memoirs, 0:18:43.359 --> 0:18:46.280 writing towards the very end buried in the back UH 0:18:46.440 --> 0:18:49.160 that he says, I regret to say that the political 0:18:49.200 --> 0:18:53.080 independence of the FIT is not carved in stone, admitting that, 0:18:53.160 --> 0:18:55.480 you know, he was very much a part of the 0:18:55.520 --> 0:19:00.000 political process that guided and shaped UH Congress, the President 0:19:00.000 --> 0:19:03.840 event UH and the so called tough minded independent central bank. 0:19:03.840 --> 0:19:07.320 Because I look back on America's Central Bank, UM, and 0:19:07.359 --> 0:19:10.560 I started my career there, as you indicated in the intro, UM, 0:19:10.880 --> 0:19:14.280 I regret to say I only see one independent chairman, 0:19:14.280 --> 0:19:16.960 and that was politically independent sharing that was Paul Vulkan. 0:19:17.760 --> 0:19:21.520 None better. So the first rule of economics I learned 0:19:21.640 --> 0:19:24.560 is there's no free lunch. Are you suggesting the FETE 0:19:24.560 --> 0:19:27.000 policy for the better part of three or four decades 0:19:27.280 --> 0:19:30.720 has been a free lunch policy. Well, yeah, I think 0:19:30.760 --> 0:19:33.840 that's not a bad image. I mean, again, if you 0:19:33.960 --> 0:19:36.960 have a central bank that at the first sign of 0:19:37.000 --> 0:19:40.600 trouble in the market is going to uh flush the 0:19:40.640 --> 0:19:44.480 system with liquidity, as the so called Greenspan put repeatedly did, 0:19:44.920 --> 0:19:47.000 maybe it's not a free lunch, but it's certainly a 0:19:47.080 --> 0:19:52.399 highly subsidized uh longstanding banquet meal. All right, So, in 0:19:52.440 --> 0:19:55.080 our last minute of this segment, rather than me being 0:19:55.240 --> 0:19:58.600 critical about the feed and economists, tell me what is 0:19:58.640 --> 0:20:04.560 it that economists do right but don't get enough credit for? Well, 0:20:04.720 --> 0:20:09.399 I I think economists are good uh at UM having 0:20:09.400 --> 0:20:14.439 a disciplined analytical thought process to identify the tensions that 0:20:14.560 --> 0:20:17.240 build in a system. That want to take a system 0:20:17.280 --> 0:20:22.359 that moves away from UH stability or equilibrium into a 0:20:22.840 --> 0:20:27.160 UM a place that needs a correction. And so when 0:20:27.200 --> 0:20:29.320 I was doing it on Wall Street, I always focused 0:20:29.359 --> 0:20:34.800 on these disequilibrium UH tensions and how they might be 0:20:34.840 --> 0:20:38.879 resolved through a correction in the economy or policy. And 0:20:38.920 --> 0:20:42.440 every once in a while I'd even wander, usually mistakenly, 0:20:42.760 --> 0:20:45.160 into the realm of how they'd be corrected by markets. 0:20:45.560 --> 0:20:48.439 You're listening to Masters in Business on Bloomberg Radio My 0:20:48.560 --> 0:20:52.000 special guest today is Stephen Roach. He is a professor 0:20:52.040 --> 0:20:55.960 at Yale UH former chief strategist, chief economist actually at 0:20:56.000 --> 0:20:59.040 Morgan Stanley, where he worked for thirty years, former chairman 0:20:59.040 --> 0:21:01.760 of Morgan Stanley a Asia. Let's talk a little bit 0:21:01.760 --> 0:21:06.439 about Asia, because long ahead of the curve, you decided 0:21:06.480 --> 0:21:09.600 that Asia was a place where global growth was going 0:21:09.640 --> 0:21:15.199 to come from, and then essentially set up Morgan Stanley's 0:21:15.840 --> 0:21:19.640 shop up there. How did that whole thing come about, Well, Barry, 0:21:19.680 --> 0:21:24.000 I was running Morgan Stanley's Global economics team UM beginning 0:21:24.040 --> 0:21:27.240 in the early nineteen nineties, and UM we had a 0:21:27.280 --> 0:21:29.880 great team. Actually, we were ranked the number one global 0:21:29.920 --> 0:21:33.639 team by II Institutional Investor. And then along came the 0:21:33.680 --> 0:21:39.600 Asian Financial crisis, and our forecast was in shambles, the 0:21:39.680 --> 0:21:41.359 number one when it ranked team. We had the worst 0:21:41.359 --> 0:21:44.240 forecast of anybody on Wall Street. So this was a 0:21:44.240 --> 0:21:47.679 great source of personal humiliation to me. So I had 0:21:47.680 --> 0:21:49.439 been to China, you know, a few times. I had 0:21:49.440 --> 0:21:51.399 a hunch that China might hold the key to the 0:21:51.480 --> 0:21:54.439 endgame of this crisis. And right around the middle of 0:21:54.520 --> 0:21:58.600 ninety seven, when the Taibot was devalued, I started going 0:21:58.640 --> 0:22:01.639 to China once every other month to figure out if 0:22:01.720 --> 0:22:04.560 China would be the next shoe to fall as many believe, 0:22:04.960 --> 0:22:07.920 and UM it quickly became evident to me that China 0:22:08.000 --> 0:22:10.080 was cut from a very different cloth, and I started 0:22:10.119 --> 0:22:13.399 doing a lot of research on China. Then I hired 0:22:13.640 --> 0:22:20.480 a brilliant young economist, Andy Say, to analyze UM China. 0:22:20.560 --> 0:22:24.480 But Andy was UH pretty green at that point and 0:22:24.480 --> 0:22:27.679 and and really had a hard time UM coming up 0:22:27.680 --> 0:22:29.240 with the types of answers that I thought would be 0:22:29.280 --> 0:22:32.040 helpful to our team. So I I went off on 0:22:32.080 --> 0:22:35.840 my own, got hooked on China uh and never turned 0:22:35.840 --> 0:22:39.760 back and wrote I remember UM my first public article 0:22:39.800 --> 0:22:44.119 in the Financial Times UM and UM uh probably the 0:22:44.160 --> 0:22:48.200 spring of that. Not only would China put a floor 0:22:48.280 --> 0:22:51.280 on the crisis, but it would emerge from the the 0:22:51.320 --> 0:22:54.320 Asian financial crisis as the new leader of the region, 0:22:54.960 --> 0:22:59.240 quickly supplanting Japan and you know more not a very 0:22:59.320 --> 0:23:03.320 controversial old statement today now, but back that was a 0:23:03.480 --> 0:23:07.520 radical shift, wasn't it. Well? It it got me sort 0:23:07.520 --> 0:23:13.200 of excommunicated from Morgan Stanley's uh Japanese centric institutional client 0:23:13.280 --> 0:23:17.320 based in Asia, and you know, my Chinese relationships that 0:23:17.359 --> 0:23:20.760 I was developing. Were actually embarrassed by they they thought 0:23:20.840 --> 0:23:23.200 that that I was going a little bit too far. 0:23:23.840 --> 0:23:26.960 But you know, it always helps, you know, and whether 0:23:26.960 --> 0:23:28.719 it's Wall Street or Hollywood, to be in the right 0:23:28.760 --> 0:23:33.640 place at the right time. And China took off, uh, 0:23:33.760 --> 0:23:37.119 right after the Asian financial crisis, hasn't looked back since 0:23:37.160 --> 0:23:40.720 then until right about now when the growth rate is slowing. 0:23:40.760 --> 0:23:45.199 This is causing a big debate. Japan has struggled. Uh. 0:23:45.280 --> 0:23:47.720 Two and a half lost decades later, is is is 0:23:47.760 --> 0:23:51.560 still going nowhere despite the hype and promise of the 0:23:51.600 --> 0:23:57.479 so called abeomics, UH policy proposals and UH. You know, 0:23:57.600 --> 0:24:01.120 I I've been deeply involved and written books and now 0:24:01.160 --> 0:24:05.440 teach classes at Yale on on Asia on China on 0:24:05.520 --> 0:24:08.400 the lessons of Japan ever since. And it's really been 0:24:08.480 --> 0:24:12.439 a very rewarding part of my own personal journey. And 0:24:12.520 --> 0:24:15.840 you lived in China for three plus years. What was 0:24:15.880 --> 0:24:18.840 that experience like? Well, I was a chairman of Morgan 0:24:18.880 --> 0:24:22.760 Stanley Asia. The office was in Hong Kong, UH, where 0:24:22.800 --> 0:24:24.800 I had an apartment that I spent about one day 0:24:24.880 --> 0:24:27.439 a week at I was on the road constantly. I 0:24:27.480 --> 0:24:30.919 spent about half my time uh in the mainland, and 0:24:30.960 --> 0:24:36.600 it enabled me to deepen my connections to officials, um, 0:24:37.600 --> 0:24:43.360 business leaders, academics in China. I traveled all over the country. 0:24:43.400 --> 0:24:45.880 On what cities did you go to in China? Well, 0:24:45.920 --> 0:24:47.600 you know, what are the standouts? I mean, I know 0:24:47.680 --> 0:24:50.280 you're gonna say Beijing, Well, yeah, idea. I did the 0:24:50.359 --> 0:24:56.280 usuals Beijing, Shanghai, shen Jin, Dalian, uh, Nanjing. UM spent 0:24:56.320 --> 0:24:59.119 a lot of time in Chongqing. Uh. You know the 0:24:59.160 --> 0:25:04.879 biggest urban city in in in the world, Shian Uh 0:25:04.920 --> 0:25:09.760 you name it, uh, changshaw uh Cheng. Do see the 0:25:09.800 --> 0:25:14.240 pandas there? Uh and uh you know China is um 0:25:14.600 --> 0:25:20.600 uh more than just Beijing uh and uh Shanghai. You know, 0:25:20.640 --> 0:25:25.359 There's there's a lot that's going on outside of this 0:25:25.560 --> 0:25:28.720 thriving coastal region of the country that you really have 0:25:28.840 --> 0:25:32.520 to know. And and I was privileged to be able 0:25:32.520 --> 0:25:34.119 to see a lot of that. Did you pick up 0:25:34.160 --> 0:25:36.640 any Mandarin or can you get by on English? Everywhere 0:25:37.359 --> 0:25:43.040 I I studied Mandarin. I had tutors um and um. 0:25:43.080 --> 0:25:44.760 You know, a couple of things along the way told 0:25:44.760 --> 0:25:47.000