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U.S. Economy in the Crosshairs
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Michael Lehmann, economic historian and an expert in macroeconomics, shows how the real estate bubble precipitated the current economic melee. |
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Economics and business professors in a panel forum at the University of San Francisco on Sept. 30 warned that the options on the table for bailing out America’s troubled investment and banking industries are “bad” and “very bad.”
Even if the proposed $700 billion bailout is approved, panel experts agreed a recession is on the horizon – the only question being, How severe? Failing to pass a bailout is about the only thing that could be worse, potentially causing credit markets to seize with catastrophic consequences.
Speaking to a packed lecture hall of students, reporters, and members of the public, three USF economists and a professor of finance echoed federal authorities, emphasizing the historic and unprecedented intervention that now appears inevitable. Such an “extraordinary time” offered a uniquely “teachable moment” on how the financial crisis began, its effects, and what’s ahead, panelists agreed.
Sunny Wong, assistant professor of economics and an expert in monetary theory, predicted a worsening economy with higher unemployment as the U.S. moves into the holiday season. Inflation and high food prices are also concerns, he said.
“In my view, even if the (bailout) is resolved on Thursday, we’re headed for a recession that will be bad and prolonged,” said Michael Lehmann, emeritus professor of economics and an expert in economic history and macroeconomics. “If we don’t do the bailout, it will be very bad and very prolonged.”
The bailout, put simply, would allow the federal government to use taxpayer money to purchase or insure – depending on which version of the plan is approved – risky subprime mortgage assets and sit on them until housing prices stabilize, when they could be sold off. Some economists believe this could be done with less loss or even at a profit, over the long-term.
Perhaps most importantly, it would help inject confidence back into a market in which banks currently fear lending to each other because of undisclosed or unknown liabilities, said Richard Puntillo, professor of finance and an expert in investment banking. “We need to get rid of the fear and that’s what (U.S. Treasury Secretary Henry) Paulson’s plan is supposed to do,” Puntillo said.
Purchasing some of the mortgage-backed securities would directly increase the liquidity, or accessible cash, of the banks. It would also, along with other measures, contribute to the gradual emergence of more efficient markets and higher prices, said Jacques Artus, visiting professor of economics who has 30 years experience with the International Monetary Fund. “Financial institutions would thereby incur much smaller losses on their holdings of those (assets) and would be left with adequate capital,” Artus said.
Panelists blamed excessively low interest rates and loose lending standards dating back to former Federal Bank Chairman Alan Greenspan’s watch in the first Bush and Clinton administrations, but laid most of the responsibility for the subprime mortgage crisis – widely viewed as the root of the problem – on lax oversight and deregulation of the real estate and investment banking industries in the last six to seven years.
“We put more into the housing sector than we ever should have, and now the chickens are coming home to roost, as the expression goes,” said panel organizer and chair Hartmut Fischer, professor of economics and an expert in international trade and international finance.
Lehmann was more pointed in a recent op-ed written for the San Francisco Chronicle. “Federal authorities initiated the real estate boom by depressing mortgage interest rates. Then they exacerbated conditions by refusing to adequately regulate mortgage lending practices,” he said. “The result: An unprecedented and unsustainable increase in real estate values, egged on by greed, skullduggery, and tomfoolery.”
If the problem of foreclosures had been tackled two years ago by assisting homeowners living in a primary residence who faced foreclosure – thereby excluding speculators, multiple-home owners, and vacation-home owners – the failure, or impending failure, of investment banks, banks, and insurance companies could most likely have been avoided, panelists said.
Instead, federal finance regulators and lawmakers now face the wrath of voters, many of whom see the $700 billion bailout as a handout to the same people who bear much of the blame for the problem.
- Originally posted Oct. 2, 2008 - 
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