Wednesday, October 01, 2008

Roach's Take On TARP / The Revised Package

Finance Asia: Stephen Roach, chairman of Morgan Stanley Asia, says the US government’s Troubled Asset Recovery Plan (Tarp), aka the Paulson Plan to bail-out the finance sector to the tune of $700 billion, deserves a grade of B-.Roach’s take: a package needs to deliver the Three S’s: 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 doesn’t 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 “significant regulatory backlash”. “The best grade I can give this is a B+,” Roach says. “The plan does deal with the issues, but in a sub-optimal way.”

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 doesn’t 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. “Most adjustments are yet to come,” Roach warns, “particularly in consumption.”

More ominously, he thinks this crisis will extend to the real economies of Asia – a process that has only just begun. “Asian economies have been the beneficiary of the US consumption boom,” 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 – 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 – 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 can’t 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.

(MarketWatch) -- The U.S. Senate is scheduled to vote Wednesday on its version of the historic $700 billion Wall Street rescue package, two days after the House of Representatives' stunning rejection of the original legislation.
The move capped a day of behind-the-scenes negotiations to try to salvage some version of the package that the House, defying President Bush and its own party leaders, rejected on a 228-205 vote.
The package before the Senate will be similar to the House version, with these additions, the New York Times reported in its online edition:
  • The higher limit for insured bank deposits sought by the Federal Deposit Insurance Corp., which asked to raise the cap to $250,000 from $100,000, to quell opposition by individual and small-business depositors.
  • Tax breaks for businesses and alternative energy, part of a package that has been caught in a stalemate in the House of Representatives. The Senate version of the gridlocked tax legislation would cost more than $100 billion and extend and expand many individual and business tax breaks, including tax credits for the production and use of renewable energy sources, like solar energy and wind power, the Times said. It would also extend the business tax credit for research and development, expand the child tax credit, protect millions of families from the alternative minimum tax and provide tax relief to victims of recent floods, tornadoes and severe storms, according to the Times.

p/s photo: Fiona Sit Hoi Kei


KoSong Cafe said...

I get dizzy reading all that. To my simple mind, too many rules lead to red tape when decisiveness by a wise but dictatorial leader would make a lot of difference. Dr. Mahathir comes to mind, in his autocratic ways, for better or worse.

Democracy has its disadvantages too. By default, in our own situation, our PM cannot make major decisions now, like the President of USA.

The Rock said...

I think the Congress will approve the Paulson Plan as they call it. However I think this will only save them for another 3 months.

The size of the problem is more than 700b. The banks need to be recapitalise. They would need another 500b perhaps. In 1998, Malaysia have both Danaharta[for bad debts] and Danamodal[for recap]. We have already shown the way my American friends !!! Just do what we did lor.

And yes your USD will go down once the market stabilise. USD is benefiting from a flight to safety syndrome.

Oh ya I just read that some hedge funds' money/assets were stuck in Lehmans !!! Holy cow - the rich beggas are losing millions maybe billions. Why should I pity the fat cats? Weeks ago I had pity on Lehman. But now I don't. Heck - they made millions during the boom time. Even the back office staff made good money - better than average for sure. Ya now is back to reality my friends. Wall Street is dead. No more fat salaries for selling junk to the rest of the world.[ABS, MBS, CDO, CFO, CDS etc.] The Americans really took the world for a ride !!!

Markets will probably be trading range bound until all the crap have been written off OR the property market stop dropping. When?? Maybe next year.

I expect things to get worse in Europe in the next 3-6 months. We are seeing signs of that - Fortis, B&B etc.

And then Asia and Australia will be hit. NZ is already in recession.

Trashed said...

Didn't the Bill fail due to Nancy Pelosi's partisan remarks ?

Silly woman - trying to set up the blame game.

At some point in time, the Senate & Congress will have to come to some agreement to make something work. Maybe something like the Resolution Trust Corporation which preceded Danaharta and Danamodal.

Roach is probably right. They might need a huge sum of money to stablise the markets or at least the perception of a huge sum of money.

More shell games ?

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