Inundated by news of a national bailout plan and the threat of economic instability, students and faculty gathered recently to hear “The Financial Meltdown: A Roundtable Discussion,” organized by the International Studies Institute.
The panel, including Donald Coes, professor of economics; Scott Findley, assistant professor of economics; Matias Fontenla, assistant professor of economics; Allen Parkman, regents professor emeritus, Anderson School of Management; Jason Smith, assistant professor of history; and Christine Sauer, ISI director, explored the relevance of the bailout for the average American.
The Emergency Economic Stabilization Act of 2008, generally known as the bailout, allows the U.S. Secretary of the Treasury to spend up to $700 billion to purchase devalued mortgage-backed securities from financial institutions that own and are unable to sell such assets. As highly leveraged homeowners began to default on their unaffordable mortgages, banks and other financial institutions around the world lost billions from holding securities backed by mortgages.
The panelists contended that the overextension of the American financial system and the encouragement of banks to make risky, unregulated loans in the form of subprime mortgages may have initiated the financial crisis.
Fontenla said the banking crisis is the consequence of excessive credit growth and lack of regulation of the financial system.
“These things are not new; people start getting greedy, not using assets for what they are supposed to. The prices get overinflated and the bubble bursts,” Fontenla said.
“People didn’t understand the risk and foreign investors didn’t know they were buying mortgage packages,” Parkman said.
Smith compared governmental economic intervention now to that during the Great Depression. He said it took an entire presidential term, hundreds of bank closures and countless jobs lost before American ideologies shifted away from a collective self-help approach toward partial government intervention in the economy.
“If the Great Depression has anything to teach us, it is that doing nothing is not an option,” he said.
Although the panelists agreed on the devastating consequences of doing nothing, some said the bailout may not prove to be the rescue that investors and homeowners are waiting for.
“It is likely the bailout won’t avert recession; [it may] just prevent the credit market from seizing up,” Findley said.
Story by Jazmen Bradford