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 US 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 US 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 US 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 US house prices boom. There was a global house prices boom," said Hubbard.
To fix the US 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 US housing market, which was the root of all the problems.
In a "very welcome development", the aggressive recapitalization of financial institutions by US 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 US house prices over the coming year, leading to foreclosures for households and devastating impacts on financial institutions.
Hubbard proposed that the US 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 US 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.
(Xinhua News Agency October 23, 2008)
