Special Report:Global Financial Crisis
HONG KONG, Oct. 22 (Xinhua) -- The United States economy
is entering a sharp but short recession, expecting a sub-par growth in the
fourth quarter this year and the first quarter of 2009, while the recovery
thereafter will be longer, said Glenn Hubbard, dean of the Columbia Business
School and once an advisor to U.S. President George W. Bush.
Speaking at a media briefing in Hong Kong on
Wednesday, Hubbard said he expected the United States to record sub-par growths,
or growths below 3 percent, in a year or two.
The U.S. consumption was expected to decrease in the
fourth quarter this year and gradual economic recovery was likely to start in
the second quarter of 2009, he added.
Hubbard said the U.S. economy is either on the verge
of or in a recession, whose depth depends on how quickly the policy responses
can right the shapes of the credit market, and that the recession may not be
very long due to active government responses.
"While I don't expect a very long recession, it could
be deep by the standards of the post-World War II era, possibly rivaling what we
experienced in the United States between 1981 and 1982," said Hubbard, who
chaired the Council of Economic Advisors under President George W. Bush from
February 2001 until March 2003.
Hubbard said the recession was deep in the sense that
it involved a substantial amount of balance sheet deterioration of households
and financial institutions, which means that the recovery is likely to take some
time.
Quick responses are what differed the current crisis
from the Great Depression of the 1930s, Hubbard said.
The professor said the current global financial
crisis had its birth largely in the international capital market due to low real
interest rate over the past decade, which has led to a boom in house prices
because they were sensitive to interest rates.
"There was not just a U.S. house prices boom. There
was a global house prices boom," said Hubbard.
To fix the U.S. economy, the policy makers should
help repair the inter-bank system, recapitalize the financial intermediators
and, last but not the least, address the problems of U.S. housing market, which
was the root of all the problems.
In a "very welcome development," the aggressive
recapitalization of financial institutions by U.S. authorities will bear fruit
relatively quickly.
Addressing the housing market will be the most
challenging, as economists forecast a further decline of 10 to 15 percent in
U.S. house prices over the coming year, leading to foreclosures for households
and devastating impacts on financial institutions.
Hubbard proposed that the U.S. government should fund
the mortgage market so that the home mortgage interest rate can move to around 5
percent, which was in line with the prevailing home mortgage interest rate if
the credit markets were normal.
The normalized home mortgage interest rate will lead
to a gradual price rebound, thus making it possible to refinance the positive
mortgage assets, which accounted for 85 percent of the home owners, while the
rest 15 percent, with negative mortgage assets totaling 500 billion to 600
billion U.S. dollars, will depend on bailout plans.
Hubbard also proposed the creation of a super
regulator for " smarter regulation."
For the fall of the Lehman Brothers, Hubbard said he
thought it was wrong for the Federal Reserve and the Treasury to let the
investment bank down without clearly communicating their principles, leading to
fear, uncertainty and suspicion.
