Stephen Roach Chairman of Morgan Stanley Asia
Market failure cannot be blamed for the Great Crisis. At the top of my list was policy failure – reckless and irresponsible conduct by the US Federal Reserve. The remedy is simple: the Fed’s mandate must be changed to include “financial stability” in its policy contract with the US Congress. That would force the Fed to be pre-emptive: to lean against incipient asset bubbles, thereby limiting bubble-induced distortions on the real side of asset-dependent economies such as the US. The severity of the shake-out shows it is ludicrous to embrace a reactive policy strategy aimed at post-bubble clean-up operations. The US monetary authority will also need to be more vigilant and disciplined in deploying its supervisory and regulatory arsenal to avoid excess leverage and a profusion of toxic new instruments. Monetary discipline was all but lost in the Era of Excess. The Fed cannot be trusted with self-regulation to atone for its sins.
