McCombs faculty discuss U.S. financial crisis

McCombs School of Business Dean Tom Gilligan hosted a lively discussion on the current economic crisis threatening America's financial stability as well as the global economy on Oct. 3 just as Congress moved to pass a $700 billion taxpayer-funded rescue bill.

Finance faculty Laura Starks, Stephen Magee, Sheridan Titman, Jay Hartzell, Michael Brandl and Keith Brown joined Gilligan to examine the wider implications of the credit crisis and the government bailout plan before taking questions from the audience of more than 400 from the university.

What are the odds of the whole housing industry across the country doing poorly all at once?

That is the bet the financial industry made, and subsequently lost, that led to the current financial crisis, said Hartzell during the forum.

Hartzell explained that banks thought risky home loans would be less so if they were pooled together. Brandl said former Federal Reserve chairman Alan Greenspan issued warnings years ago about these loans.

"But people's response was, 'We're making money, so it's ok!'" said Brandl. But when housing prices across the nation began to drop, the bottom fell out for both borrowers and lenders.

"As long as real estate prices were going up, things were fine," said Brown. "It was when the real estate market fell that these things came to fruition."

As huge investment banks such as Lehman Brothers lost billions of dollars and began to crumble, the housing and credit crisis became a stock market crisis.

"People are pulling their money out of the stock market and running for treasury bills," said Starks. "They're panicking about their 401ks. People are starting to think about postponing retirement.

"You know, faculty don't have to retire you may see us when we're 90 years old," she added.

Of course if you have available cash, now is a great time to buy stock, said Brown.

"Warren Buffett is the winner in all of this," said Titman, referring to Buffett investing billions of dollars in shares of Goldman Sachs and GE.

The Great Bailout Debate

The most spirited part of the discussion came in a debate on the merits of the government's $700 billion bailout plan. The forum took place just after the House voted to accept the bill.

"I would argue that this may not be a good bill, but we need it now," said Starks. "If we wait, a lot of people are going to suffer and lose their jobs."

Titman disagreed, arguing it would it would be more prudent to take additional time to create a better plan. "It reminds me of a scene from 'Animal House' where the fraternity president says something in the order of 'In the time of a crisis, it takes someone to make an enormously stupid gesture, and I think we're the ones to do it.'"

Brandl said some action must be taken, but cautioned against viewing any plan as the only answer. "There's so much uncertainty in the markets, that we need to do something. But we have to be very careful in thinking this bailout will solve all our problems."

Magee injected a dose of pessimism into the discussion, saying politics and the economy just aren't meant to work together. "The [James] Madison paradox says there is no way to stop corruption in a democracy, because special interest money will always infiltrate," Magee said. "When politics and economics mix, the 'regulatees' end up controlling the regulators."

He added, "You can take a mortgage and break it into 20 pieces, and everyone makes money. But this only works when the sun shines. When you have a hard rain or Hurricane Ike, it doesn't work. The banks brought this on themselves."

To watch a video of the forum or leave comments about the discussion visit McCombs Today, a new site created by the McCombs School of Business to provide the latest news from the school as it happens.