Consumer Debt Forgiveness May Be Needed: Roach

American consumers have too much debt, not enough savings and are afraid they will lose their jobs—if they haven't lost them already.

It might be time for something that hasn't been done since the 1930s to get Americans spending again: national debt forgiveness, Stephen Roach told CNBC Monday.

A stronger dollar or higher interest rates would encourage consumption and saving, Roach said, but he prefers the more "direct approach" of coming up with "ways to forgive the excesses of mortgage, installment and revolving credit, as what was done in the 1930s, that will help consumers get through the pain of deleveraging sooner rather than later."

The nonexecutive chairman at Morgan Stanley Asia and senior fellow at Yale's Jackson Institute said the American consumer makes up 71 percent of gross domestic product, but growth is up only 0.2 percent over the last 14 months.

"The American consumer...is going nowhere," he said. It’s a Japanese style balance sheet correction. If we don’t address that, all the public policy aimed at the fiscal and monetary stimuluses are going to be pushing on a string."

Debt forgiveness may hurt lenders, Roach said, but "they’re the ones who wrote the bad loans and they're the ones who had the free ride. There's no gain without some pain and we have to decide who in society has to bear the brunt of that."

At the same time, "politicians don’t want to inflict pain on any constituency," Roach said. "We have a leadership deficit. People are unwilling to take the tough choices and say, 'This is going to be painful for a while, but we’re going to come out the other side.' "