Ex-Treasury head: US economy to get better in year or 2

By Brian McNeill

Published: September 9, 2008

By Brian McNeill

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The United States’ faltering economy will probably begin to improve sometime between May 2009 and March 2010, said former U.S. Treasury Secretary John W. Snow.

“The American economy remains very resilient,” Snow said, speaking Tuesday at a global economic summit at the Miller Center of Public Affairs at the University of Virginia. “We’ve clearly had some excesses, but those excesses are being addressed. We’re going to have slow growth for some period of time. But it’ll look a lot different and we’ll be in better shape in nine to 18 months.”

While the U.S. economy has been buoyed by strong exports, it continues to be dragged down by the slumping housing market and the credit crunch. The housing market will not improve, he said, until prices drop and the inventory of houses for sale starts to decline. Plus, Snow added, banks are continuing to lose vast sums of money as they find themselves with little choice but to write down numerous defaulted loans.

“The U.S. economy is clearly in a slowing period, facing lots of headwinds growing out of the housing market,” he said.

Snow convened more than a dozen former foreign financial ministers at the Miller Center to discuss the challenges facing the world’s economy.

The summit, the ministers said, took on a greater level of importance as America’s current economic woes are spilling over into other nations. The United States’ economic troubles came to a head Sunday with the federal government’s seizure of mortgage giants Fannie Mae and Freddie Mac.

After two days of sessions, the ministers announced that they had agreed on several reforms that they believe would help avert future financial meltdowns of global proportions.

“We met with the hope that just maybe we could share some of our experience, understanding and expertise to help current and future finance ministers in the critical work that they do,” Snow said.

First, the delegates said, the United States needs to fix its “broken financial system.”

America’s housing crisis, they said, was brought about by overly lax government regulation and a lack of internal oversight by private financial firms. Essentially, many mortgage lenders offered loans without worrying if a borrower could repay the loan. Many of the loans were packaged and sold off, so loan originators had little incentive to scrutinize borrowers and every incentive to provide them with a mortgage loan regardless of risk.

“It’s banking 101,” said Kito de Boer, managing director of McKinsey & Co. in the Middle East and a conference participant. “My 6-year-old daughter knows that you don’t lend money to people who can’t pay you back.”

America must strengthen its oversight of its financial sector to minimize the chances that economic problems in the United States negatively impact the rest of the world, the delegates said.

At the same time, the delegates agreed that the global economy requires a greater level of oversight. They called for strengthened worldwide financial institutions such as the International Monetary Fund to stave off future economic crises. Plus, they agreed, global financial institutions need to give a seat at the table to emerging nations, such as China, India and Brazil.

The ministers also agreed that nations must grow in a sustainable fashion. Future demands on food, energy, arable land and a changing environment require environmentally conscious growth, they said.

Several ministers suggested that the United States’ economy ought to be subjected to greater monitoring by the IMF.

“Sometimes the view from the outside is more clear than the view inside, which is always mixed-up and opaque,” said Yashwant Sinha, who was India’s finance minister from 1990 to 1991 and in 1998 until 2004.

The ministers’ recommendations will be presented to the IMF at its October meeting in Washington.

The two-day global economic conference at UVa is the first of what will be an annual series of summits on the world’s economy. The summits were made possible by an endowment from Mortimer Caplin, a UVa alumnus and benefactor.