We have met the culprit causing the financial crisis and it is us, Wight Martindale ’60, Martindale Center Fellow, told a Lehigh audience Wednesday.
Listen to answers to the audience's questions
“The problem is that we all have too much debt,” said the one-time financial editor for Business Week magazine and a former institutional bond salesman for Lehman Brothers.
That debt, coupled with unsound financial practices, caused the economy to falter and enter a recession, Martindale said during a special Chaplain’s Forum at Linderman Library Wednesday. But a greater “catastrophe” may be avoided, he added.
In his lecture, titled “The Wall Street Crisis: We’re all involved … and always were,” Martindale gave an insider’s perspective of the past, present and future of Wall Street and the economy at large.
Martindale described the circumstances that led to the current economic crisis, the most important of which, he said, was the failure of Lehman Brothers. When the global investment bank collapsed, its $680 billion in assets became worthless. As a result, companies that invested and dealt with Lehman Brothers, including the insurance giant AIG and the Reserve Fund, teetered on the brink of failure before the U.S. government rescued them.
Martindale described the events of the past month as harbingers of difficult times, but he outlined a path that he believes would lead to eventual recovery.
“We’ll still have a recession. We’ll still have job losses. It will still be unpleasant, but the alternative is not unpleasant—it’s a catastrophe,” he said. “That’s what I hope we avoid, and I think we can avoid.”
First, he said, money must be invested into the banks and other financial institutions to buttress the market. This money will probably come from the U.S. Treasury through a bill now before Congress. If the legislation is handled shrewdly, he said, the American public may regain the money invested.
Banks are likely to survive by consolidating, and by offering savings accounts and safe loans, which will help them generate revenue.
“Their bet is that they will grow their way out of this,” he said.
He encouraged audience members to continue banking as usual.
Once the market stabilizes, new regulations will foster and protect future investments, he said. Martindale praised the economic expertise of Ben Bernanke, the Federal Reserve Chairman, and Sheila Bair, the chairman of the Federal Deposit Insurance Corporation.
With their leadership, “I think we have a chance of working it out,” he said.
The role of China
“The last ray of hope, which I think is a ray of hope, is China,” Martindale said.
The Chinese government has approximately $1 trillion invested in the U.S. dollar, two billion people and a desire to expand economically, he said. Their building projects and economic development may generate jobs and help buttress the global economy.
Ultimately, he said, the solution comes from the same source as the problem: us.
“We are all shrinking our balance sheets. We’re all reducing our debt and it’s always painful to reduce your debt,” Martindale said. “Everybody has to do it. The government has to do it. Businesses have to do it. Humans have to do it.”
Starting Oct. 15, Martindale will delve into the details of the collapse in a one-credit economics course titled “Eco 195: Managing the Financial Crisis.”
On Wednesday Jim Dearden, chair and professor of economics in the College of Business and Economics, estimated that more than 50 students had registered for the course since it became available one day earlier.
Q: The news reports seem to blame faulty mortgages and the way they are packaged and sold for the crisis– do you agree?
Q: How will changes in the banking structure impact regular folks as they do banking every day?
Q: Where is the money given to the banks and other financial institutions coming from?
Photo by John Kish IV
Posted on Thursday, October 02, 2008