Treasury Sees US Economic Recovery in Late 2009

U.S. Treasury Undersecretary David McCormick said on Wednesday the U.S. economy is in for a challenging few quarters but could start to recover late next year.

"The coming quarters will be very challenging," McCormick told a lunch in Hong Kong.

He said, however, that the U.S. economy was resilient despite challenges posed by turmoil in the financial sector.

"Our hope is that (the U.S. economy) will turn upward toward the end of 2009," he said.

Financial markets had responded positively in some ways to concerted action by governments around the world to calm financial turmoil, but much work remained, he said.

"The name of the game is to bring back confidence to the financial market," he said.

U.S. government action in the past two months, including giving the U.S. Treasury broad authority to buy and insure mortgage assets and equity securities from financial institutions, had helped stabilize financial markets.

If the Treasury had had such authority in September, the outcome for Lehman Brothers , which the U.S. government let collapse, might have been different, he said.

"There was no obvious buyer (for Lehman)," McCormick said when asked why Lehman Brothers was allowed to collapse but rival investment bank Bear Sterns was saved.

"Lehman also had a much bigger balance sheet and the U.S. Treasury did not have the authority it has now," he said.

"If the Lehman situation was now, it might have been a very different outcome."

Glenn Hubbard, a former senior economic adviser to U.S. President George Bush who was also in Hong Kong on Wednesday, said the U.S. was probably already in a recession that could rival that of 1981-82, but was not heading for a depression scenario.

As the U.S. housing market was the root of the economic and financial turmoil, Hubbard said the U.S. government should buy negative equity mortgages from the private sector and fund the mortgage market to restore mortgage rates to levels of around 5 percent.

That could push up home prices by 10 percent in the next year, he said.

Mortgage losses in the United States total between $500 and $600 billion but banks had already written off a good chunk of that, Hubbard said.

"It's possible the government would need to spend no more than $200 billion," he said.

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