NEW YORK (Reuters) - Former General Electric Co (GE.N) Chairman and Chief Executive Officer Jack Welch said the U.S. economy faces a deep downturn in coming quarters, and he supports a proposed $700 billion government rescue package for the financial sector.
“I now believe we are in for one hell of a deep downturn,” Welch told the World Business Forum in New York on Wednesday, adding that the first quarter of 2009 will likely be “brutal.”
Until recently, Welch said, he had believed the U.S. economy could avoid recession, but he has changed his mind.
“I am now caving,” he said. “Get ready for real tough times. They’re coming. There is no credit available.”
Welch said mortgage lenders, legislators, investment bankers and others are all to blame for the crisis, which stemmed from easy credit and investors’ appetite for yield.
“The problem was money didn’t cost anything,” Welch said. “People took swings.”
He likened the crisis to Agatha Christie’s “Murder on the Orient Express,” in which all the suspects turn out to be guilty; but he singled out the role of investment banks in the crisis.
“We have to look at the damn investment bankers,” he said. “They’re playing with other people’s money. The only penalty was a cut in their bonus, not their head.”
Welch praised the actions taken so far by Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and New York Fed President Timothy Geithner, calling them “brilliant public servants” who have “not let ideology get in the way of taking action.”
“Thank God we have Bernanke, Paulson and Geithner,” Welch said. “We have to act.”
He said the U.S. economy would eventually recover, but this recovery would likely be gradual rather than V-shaped.
Asked whether the current crisis would change the character or shape of the U.S. capitalist system, he held his index fingers about 5 inches apart and answered, “For this long.”
The 72-year-old Welch served as chairman and chief executive of GE from 1981 to 2001 and currently runs an advisory firm for business leaders. He has written or co-written two books on leadership.
He said the biggest change since his GE tenure is that globalization has intensified, and the world is more interconnected. As economies become more interdependent, he said, prospects for world peace improve.
Welch was also asked about the GE executives he had groomed as possible successors, including Jeff Immelt, who took over GE’s leadership in 2001.
Welch said he supports Immelt’s changes to GE’s portfolio of businesses, even as GE moves to sell off some assets that Welch had bought.
“You want change, fresh eyes to look at things,” he said about Immelt.
About GE alumnus Jim McNerney, Welch said that the current Boeing Co (BA.N) CEO is doing “just fine,” adding that he likes McNerney for taking on Boeing’s unions.
And Bob Nardelli, who heads automaker Chrysler LLC, is “doing as well as he could be in a brutal (industry),” Welch said. “If it works out, it’s going to be one of the great turnarounds of all time.”
Tougher fuel economy standards mean that Detroit automakers deserve “some support,” Welch said, but their case for a $25 billion government package is not as clear-cut as the case for the financial rescue package now being debated in Congress.
In the current environment, Welch said, business leaders should focus on their cost structures, reduce debt, and take care of their best employees. Leaders of organizations must also communicate as often as possible about their vision and take advantage of investment opportunities as they arise.
“If you have capital, you can do what (Warren) Buffett did this morning,” he said, referring to Buffett’s $5 billion investment in Goldman Sachs Group Inc (GS.N). “That’s what smart people do in times like these.”
Welch said he supports Republican Presidential nominee John McCain and said he would work for $1 per year on a McCain task force to help the economy if asked to do so. He said McCain’s policies would be more likely to create jobs than those of Democratic nominee Barack Obama, in part because Obama is overly beholden to labor unions.
The United States functions better when the executive and legislative branches are held by rival political parties, Welch added, so there is an exchange of ideas.
Reporting by Nick Zieminski; editing by John Wallace and Gerald E. McCormick