"We're in a post bubble world now," says Stephen Roach, chairman of Morgan Stanley Asia. Although it might have started off as a Wall Street phenomenon, he says, the successive collapse of bubbles û the bursting of the property bubble, followed by the bursting of the credit bubble, which in turn popped the US consumption bubble û is without doubt a problem that is hitting Asia.
"With two consecutive declines of real consumption of more than 3% in the last two quarters, the US consumer is now toast," he says. The result is that Asia, with 45% of its output directed towards exports, is more dependent than ever before on supplying goods to the rest of the world. "There is not a country in the region that is not in recession or slowing down as a result because the biggest end market for its export-led economies is in serious trouble," says Roach.
The outlook among panelists was generally pessimistic, but there was one optimist present. Marc Lasry, chairman and CEO of Avenue Capital Group, admitted that while it is impossible to pinpoint the bottom of the market, it is possible to time the cycle. "If you're comfortable that we're not going into a depression then now is a phenomenal time to buy," says Lasry.
When confronted with the idea that a turnaround might not be so quick, and that the US might experience a Japan style 'lost decade', Lasry replied that governments have forced the banks to recognise their loses "and as a result, the banks will start lending again in the first or second quarter next year after they've taken their hits. And when this happens the consumer will come back."
Laura Tyson, professor of Haas School of Business at the University of California, highlighted the role that governments need to play and pointed to two possible directions. First, since capital markets are "fundamentally broken" they can no longer recognise risk from lack of risk. As a result, the capital market crisis has turned into a panic and governments need to become buyers of assets.
The other role that government can play relates to spending. Since there is a total collapse of private demand, the government needs to make up the difference. And any country that can afford to engage in economic stimulus should be doing it now, she says. "It should be a quick spend out. It should be infrastructure, job creation, and mortgage relief.ö She cited China as an early starter in this resolve and Germany as a country notably lacking in such a plan.
We are, she says, heading for an L-shaped recession. If government policy is effective, the recovery might be slightly less horizontal than otherwise.
Government policy was also on the mind of Lou Jiwei, chairman and CEO of China Investment Corp, China's sovereign wealth fund. After informing the audience that it can hardly be China's role to save the world economy, he turned to policy. What concerns him, he said, is the lack of constancy in the policy responses to the financial crisis in developed countries. "If it is changing every week, how can I be confident?" he asks. It is this high degree of uncertainty that has led him to avoid further investment in Western financial institutions.
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