Students squeezed in with reporters and TV news cameras to hear a panel of economists explain how the U.S. economy reached its current financial state, with many banks teetering on the edge of collapse and the economy flirting with recession amidst a liquidity crunch, falling housing prices and extreme investor pessimism.
The USF Economics Department hosted the panel, comprised of professors from their department as well as the School of Business, who presented their views on the need for a bailout package and how different political actions might impact today’s faltering economy.
The discussion could not have been more timely given last Monday’s congressional rejection of a comprehensive $700 billion bailout proposal. That proposal had been hastily constructed, but was backed by the White House and many Democrats and Republicans in a failed bipartisan effort in the House of Representatives.
The bill has since passed and was signed by President Bush last week.
The panelists largely supported the bailout effort, and Professor Hartmut Fischer said, “If [members of Congress] don’t act, we will have a recession by Christmas.” Fischer later said that he meant the statement as a call to action, not a literal prediction. He was referring to the difficulty retailers will have in borrowing money to load up on merchandise ahead of the holiday shopping rush, as they normally do.
The four panelists explained how the financial crisis stemmed from low interest rates and relaxed lending standards that caused a boom in the housing market. This eventually lead banks to falter because they are highly tied to the mortgage market, which includes substantial exposure to sub-prime and alt-a mortgage-backed securities – assets that have come under high risk of default by borrowers in recent months.
The professors discussed the need for a bailout package and expressed their support of Federal Reserve Bank President Ben Bernanke and Treasury Secretary Henry Paulson. They noted that while the political process has failed to rescue the country, there are still tools available to Paulson and Bernanke, including lowering interest rates and other more creative solutions.
Professor Jacques Artus said a large component of the crisis is that mortgage-backed securities are being valued by the market at a level below their true price because investors have been too afraid to widely trade them in recent months. The process of “marking to market,” or accounting for an asset based on the value it trades at in the marketplace causes a huge problem when that market evaporates. “This is the difference between bankruptcy and liquid capitol,” Artus said.
The panel concluded by taking questions from the audience. One of the questions from a concerned student was about how the financial crisis will affect student loans. Artus said he did not believe that current loans would be affected at all, but noted tighter credit markets might make getting additional student loans more difficult. Changing interest rates will also affect the amount of money borrowers have to pay back.
Sophomore international business student Katrina Oropel said that she enjoyed the panel’s discussion. “It clarified a lot of questions and misconceptions that I’ve had,” she said.
“This is the kind of thing you learn about -but it’s really happening now,” said junior Tiffany Gresham, who attended the discussion in hopes of gaining some insight into the security of her finances. “After banks started being bought I was scared, I wondered if I should take my money out. I wanted to know if [the bailout] would affect my financial position.”
Gresham, like many students who attended the lecture, hoped to gain a better understanding of the financial crisis that is being hailed the worst since the Great Depression, and that will certainly be a defining moment in the economic history of this generation.