This essay is based on a lecture given by Mr Stephen Roach on June 22, 2009 to the Rafael del Pino Foundation in Madrid, Spain.
Here are the opening paragraphs:
Like all crises, this too will pass. But the severity of the current debacle – not just in financial markets but also on the real side of the global economy – points to a very different post-crisis healing than that which has taken place in the past. Most importantly, over the foreseeable future, the macro environment is likely to be characterized by the combination of lingering problems in a damaged financial system together with an unusually anemic recovery in the global economy.
Tensions will undoubtedly persist in such a tough post-crisis climate. In sharp contrast to the V-shaped recoveries of yesteryear, when relief was quick and powerful, the next several years are likely to reflect a persistent fragility, punctuated by periodic setbacks. Politicians and policy makers are unlikely to be content with such an outcome. As a result, they should continue to lean heavily on their fiscal and monetary arsenals in an effort to overwhelm the headwinds of a weak and tenuous recovery.
Yet contrary to the buzz of neo-Keynesian thinking, the post-crisis world needs far more than the sheer brute force of pro-growth policies aimed at forestalling a relapse. A break from the broken strategies of the past is an urgent imperative. To the extent actions are aimed at resurrecting the failed unbalanced growth models of yesteryear, yet another wrenching crisis is a distinct possibility. Mindful of such perils, the authorities need to be tenacious in uncovering the problems and mistakes that got the world into this mess in the first place. Only then can a crisis-torn world transform imbalances into balance and turn angst into opportunity.
This is not a crisis of capitalism. Ultimately – albeit with seductively long lags in many cases – the invisible hand of creative destruction worked with brutal efficiency. It is, instead, much more a crisis in the governance of capitalism. An ideology of self-regulation supplanted the discipline and oversight that an increasingly complex system required. It will take bold and visionary leadership to reverse that trend and regain control of a precarious financial system and an asset-dependent global economy. But there is really no other choice. The body politic must get governance right in this post-crisis world.
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Source: Morgan Stanley, June 26, 2009.
