Neal, what is the Credit Suisse view of the global economy for next year?
For 2012, I think the U.S. is likely to have a persistent recovery—inadequate in scale, choppy, mixed in terms of sectors—but nonetheless persistent growth. I think China is in much the same circumstance. Europe is the other big block. There, I think you have to anticipate that they’ll have no growth at best for the early part of the year and potentially, of course, something more severe than that.
What will we see in investment?
I think in financial terms, the issue that is starting to manifest itself is a great tug of war between two conflicting forces. One force consists of the major central banks around the world—the Bank of Japan, the Federal Reserve, the Bank of Canada, the Bank of England, the ECB, the Swiss National Bank. These major centers of financial life are all holding rates constant at very low levels. When the rate of return on cash is held fixed at low rates for a long horizon, that pushes down volatility and in principle would, therefore, push up the prices of risk assets all over the world.
On the other side, you have economic recoveries that are half-hearted or worse and that are not getting the benefit of ever-easier credit conditions. If anything, the shocks of the great financial crisis and the reregulation that’s under way mean that credit standards are fluctuating around a much tighter average level than used to be the case. That means the economy is more volatile than it was before. So now you sit there and say, “Now wait a minute. If the economy is more volatile, doesn’t that mean that risk assets should be cheaper?” But then again, if the central banks are telling you that cash is going to be at zero for a long darn time, doesn’t that tell you risk assets should get more expensive? That’s the tug of war.
This issue of unemployment is getting a little old, isn’t it?
It’s getting a little dangerous, in my opinion. I do really worry about the well-being of our society. You think about America at the moment, we’ve got a Japanese financial system. We’ve got a European labor market, and we have the kind of income distribution that you find in an emerging market. I don’t think any of those problems can be solved unless you solve all three. It’s not obvious to me that there is a magic pill to solve any one of them.
Is there a public policy you’d like to see for 2012?
One issue is that as the European banks get recapitalized, one of the mechanisms for raising their capital-asset ratios will be for them to reduce their assets. And the assets that I think come most naturally for a European bank to get rid of are their U.S. dollar assets, particularly mortgages. They have to fund them with dollars. Dollars are hard to come by. The return from their point of view once they translate back into their home currency is not that fantastic. Put all that in the soup, and they’re going to be selling mortgages is my guess.
Who is the natural buyer?
Well, the answer is not our banks here in the states. It’s not clear to me how much the REIT industry can take, so it seems to me that’s why we’re hearing the Federal Reserve already speculating about a third round of quantitative easing, with a special emphasis on buying mortgages.
Now does that clear the housing market?
It doesn’t. But if you don’t do that, then the housing market sure gets worse.
What role will austerity play in 2012?
The key is credibility over the long run. Telling business leadership, telling households and so forth that we are really serious about getting the public finances under control, that we really are willing to acknowledge that there are dimensions of the standard of living that we can’t afford—at least right now—would, in fact, allow people to make their plans for the future with a greater sense of confidence.
I think the U.K. is doing a better job of this than most. I think the states within the U.S.— not the federal government but the states themselves—are doing a better job. I think that the half-hearted sorts of measures that you’re seeing in some parts of Europe, and certainly at the federal level in the U.S., have the opposite and negative effect on current economic performance.