The Brookings Doha Center, in October, invited Glenn H. Hutchins, co-founder and co-chief executive of Silver Lake Partners, and a trustee of the Brookings over lunch to talk on the swelling of global fiscal crisis.
Hutchins recognized economic crisis of 2008 as the “the biggest asset bubble in human history.” Americans acquired liabilities which they couldn’t pay back and started avoiding loan payments. Hutchins was of the opinion that homeowners defaulting on mortgages caused the bubble to burst. Collapse of Freddie Mac and Fannie Mae, which followed the decline of housing market, hurried bank crisis. Hutchins thought Lehman Brother’ failure to be the critical moment for starting the downward twist. In a matter of weeks, the withdrawal from bond funds and stock market amounted to 700 million dollars. This caused the credit market to shut down. Economy can’t sustain in the absence of credit movement and people became thrifty. As unemployment went up, consumer confidence took a plunge. Hutchins told audience that there was no doubt that the financial sector was largely responsible for economic crisis of 2008, the other factors that contributed to economic crisis included low consumer consumption, and financial deficits caused by financing of two wars and extensive regulatory failure.
Talking about the present position of US economy, Hutchins remarked though the beginning has come to an end, the end has not started yet. He pointed out that economy has stabilized and period of free fall was over. The residential market in the US is showing signs of recovery as prices are rising, though by a very small extent. Hutchins referred to the statistical data showing that at present the US has had 26 million workers who were overqualified for the jobs they were doing, while there were 19 million houses lying vacant. Further, the US was production was 1.2 trillion dollars less than what it could have produced. He estimated that on the whole there was stabilization of economy, though of lower level.
Hutchins predicts it would take minimum two years for getting back to continuous economic growth; rate of unemployment will come back to normal in five years, and housing market will recuperate in six years. He foresees US budget to be essentially financed by foreign capital. China, holding foreign exchange reserves worth three trillion dollars, will play a significant role in the process of recovery and global economy. He expressed his belief that a feasible solution to the ongoing global economic suffering is innovation as despite the financial restrains, people would prefer spending on modern technology. He warned policymaker to be watchful of present policies being used for pounding the economic crisis of 2008, lest they should sow the seeds for next crisis.
Hutchins also answered questions pertaining to future of US dollar, including if the financial service industry contributed the most towards economic crisis of 2008. Though he wondered if the dollar has declined as the principal global currency, he suggested the viewers not to reject free market capitalism. He was optimistic of the financial service industry to reappear. He was of the view that the government should be more consistent in its policies, citing the case of auto industry that was bailed out while steel industry was overlooked.