Security & Conflicts

GLOBAL INVESTOR FOCUS Security & Conflicts — 53
Photo: Johannes Kroemer
of New York, you also look at these
issues. Is there a case for a central bank
to target asset prices?
Glenn Hubbard: It’s not obvious to me
that we have a large increase in global
saving. What we have is a real change in
the composition of saving. The vast
bulk of the incremental saving, as I said
earlier, is being done in economies
which don’t have very well functioning
financial systems. What that does is spill
money over into the international capital
market: for example, into US Treasury bills.
So you can get a lot of froth in the housing
market, as the equilibrium interest rate
is held low in safer countries like the US.
I don’t think there is an argument for
the Federal Reserve or any other central
bank to directly target asset prices,
because in order to do that you would
have to believe the central bank has
better information about whether there is
a bubble. What the central bank has to
do is to clear up the bubble if one bursts.
How risky is the US housing market?
Glenn Hubbard: We are not going to
see much more nominal house price
appreciation in the US market. Overall in
the US I don’t think we had a housing
bubble as economists typically use the
term. We had very low interest rates, and
there was very high investment in housing
given those interest rates. Nonetheless,
housing woes will subtract a fair amount
from US consumer spending over the
next two years. Most economists believe
capital spending in the US will take up a
good chunk of the slack. That’s why
most forecasters still see growth in the
2.5 – 3.0% range. Housing prices
certainly remain a real risk, and there are
parts of the US where house prices
are starting to decline in nominal terms.
But nationally I don’t believe that’s the
case.
“If the Federal
Reserve had to
raise short-term
interest rates
quite rapidly, that
would hurt the
economy.”
What is your assessment of the trajectory
of the US GDP? Do you see a shallow
slowdown in coming months or do you
think there is going to be a much
broader based slowdown?
Glenn Hubbard: I would have to speak
in terms of scenarios, because there
are a lot of wild cards. If the Federal Reserve
has a credible anti-inflationary
policy and we don’t see major geopolitical
events that would disturb energy prices,
then I think we are on track to have
a modest slowdown, growth slipping into
the 2.5% range – not the very rapid rate
of growth we’ve seen recently, but certainly
not recession. However, we could
see slower growth for one of two reasons.
I for one believe the Federal Reserve
is a bit behind the curve in fighting inflation.
If the Federal Reserve felt it had to
catch up and raise short-term interest
rates quite rapidly, that would obviously
hurt the economy. Also, there could be
energy price hikes from geopolitical events.
The fact that the consensus is relatively
rosy shouldn’t be that reassuring. Economists,
myself included, are not always so
good at predicting turning points.
You were a member of the White House
National Economic Council and the
National Security Council. How does the
need for increased security affect the
economy?
Glenn Hubbard: It does so in several
ways. First, if there is a requirement for
increased military spending over time,
eventually that has to be paid for by either
cutting down spending or raising taxes.
There is also the issue that people need
to come to terms with in the US, as well as
Europe and Japan, and that is homeland
security spending – the amount of
money we are paying in terms of
higher transaction costs on account of
security. I think there has not been
enough assessment of whether we are
doing this in the most efficient way
to help business people maintain high
rates of productivity.
Given your experience on the boards
of some well-known investment
firms, what is your view of the challenges
investors are facing today and the
message we should take to our clients?
Glenn Hubbard: First of all there are
some incredible opportunities. At one
of the companies with which I am involved,
Ripplewood, we continue to find interesting
opportunities around the world.
We are extending our presence in
Japan. There are abundant opportunities in
Europe, in the US, and in the emerging
Asian economies. I don’t think there is
a shortage of opportunities. The question
is how you sort these opportunities
out. There are a lot of private equity firms
around today and some of them have
highly skilled people running them and
others less so. The question for investors
is finding the right kind of private equity
with which to work. Private equity as
a form of investment can only grow, particularly
with the US regulatory regime
making public company solutions a little
more costly. Private equity becomes all the
more attractive.