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Economists Analyze Nation's Financial Crisis
Professors discuss possible solutions for current economic problems
AUSTIN, Texas -Oct. 6, 2008- The United States is in the midst of an economic crisis that is threatening the country's financial stability, as well as the global economy. The crisis began with a collapse in the subprime mortgage market, and, in short order, longstanding institutions such as Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, as well as several well-known banks, failed, filed for bankruptcy or were taken over.
It may be months before the full impact of the crisis can be assessed, even with the United States Congress passing a $700 billion taxpayer-funded rescue bill.
Commentary around the water cooler and in the news media has ranged from those who feel Congress was right to act quickly to pass a rescue bill to those who feel America is better off allowing troubled firms to fail, after all, that is what the free market is all about.
At The University of Texas at Austin, reaction from students, staff and faculty is as diverse as the potential solutions. Among 10 professors from varying disciplines, two expert economists from the College of Liberal Arts shared their analysis on the dilemma.
Daniel Hamermesh
The Edward Everett Hale Centennial Professor of Economics
What we have here is a classic panic of the kind we had during the Depression in the 1930s and at occasional intervals since. Credit dries up because of a crisis of confidence. Of course, the federal government can buy up bad debt. But the more important thing is the restoration of confidence so that lenders are willing to lend.
Talk will not do, nobody trusts President Bush on anything right now, and clearly most do not trust Congress either. Increasing the FDIC insurance on bank accounts from $100,000 to $250,000 is a good first move, it encourages the average consumer. Better still would be a statement, and an explicit plan, from the federal government to isolate the bad loans and those parts of derivatives that are built on them, value them quickly and conservatively, and buy them up. This essentially means a federally supervised restructuring of debt.
In the end, if the valuation is done correctly it should cost the taxpayer very little, while at the same time isolating the infection that has been built upon the subprime bust that occurred as housing prices began to fall.
James Galbraith
The Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government, LBJ School of Public Affairs
Going forward let's think about the next upswing in our economy and how we can help power it. If the 1960s were about raising baby boomers and the '90s about technology, what should the '10s and '20s be about? It's obvious: energy and climate change. That's where the present great unmet needs are.
So, let's use the next few years to plan, mapping out a program of energy conservation, reconstruction and renewable power. Let's get the public sector and the universities working on it. And let's prepare the private sector so that when the credit crunch finally ends, we'll have the firms, the labs, the standards and the talent in place, ready to go.
Some will ask if we can afford it. To see the answer, don't look at budget projections. Just look at interest rates. During the current panic, in mid-September the interest rate on the 90-day Treasury bill hit zero. This meant the federal government could fund itself, short term, for free. It could have raised money for 30 years and paid less than 4 percent. That's far less than it cost back in 2000.
No country in this situation is broke, or insolvent, or even in much trouble. For once, Wall Street's own markets speak the truth. The financially challenged customer isn't Uncle Sam. He's up on Wall Street, where deregulation, greed and fraud ran wild.
Learn more in the feature story "Balance Due."
Contact:
Christian Clarke Casarez
Director of Public Affairs, College of Liberal Arts
512-471-4959
christianc@mail.utexas.edu