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Experts explore implications of financial crisis



Nandu Nayar, shown here on the floor of the New York Mercantile Exchange, told those attending the panel discussion: "Contrary to popular opinion, greed is not only a U.S. characteristic.”

News about the financial crisis has left most Americans stunned, if not a little confused, about how the collapse of sub-prime mortgages could cause a worldwide panic in our markets.

While some experts argue that fear is largely unwarranted and that international media attention has only stoked that flame, it is widely accepted that the American economy may be heading toward a recession that may be the most severe in a generation.

But how did this all happen? And are the government and the financial community correctly addressing the matter, or are their actions causes for greater concern?

Those and other topics were open for discussion this week at a university-wide forum hosted by Lehigh’s College of Business and Economics, which recently launched a Web page about the financial crisis.

The forum, featuring a panel of business school faculty, was the latest of several events at Lehigh designed to engage the community and discuss the implications of the crisis.

Tony O’Brien, professor of economics, took time to explain the events leading up to this fall’s troubling headlines. He argued that the crisis was a result of a combination of falling housing prices, widespread ownership of mortgage-related securities, and high leverage.

“Falling house prices and rising defaults reduced the value of mortgage-backed securities and CDOs (collateralized debt obligations),” O’Brien explained. “Highly leveraged financial firms suffered huge capital losses as a result of these falling security prices.”

"A perfect storm"

The failure of Lehman Brothers and the inability of the Bush Administration to appropriately address the changing landscape led to greater problems, said Wight Martindale ‘60, executive-in-residence.

“On the 29th of September, the House made its contribution by [initially] rejecting a bailout plan that simply had to pass. So now, we have a Congress that doesn’t work, and a president who guesses wrong, and four candidates who don’t really understand the issues,” Martindale said.

“This is what I mean by a perfect storm that has created a lot of uncertainty and chaos in the system.”

The impending crisis had global implications as well, said Nandu Nayar, the Hans Baer Chair of International Finance who is currently with the U.S. Securities and Exchange Commission.

“Contrary to popular opinion, greed is not only a U.S. characteristic,” he said, referring to questionable real estate practices overseas and faulty investment practices in countries all over the world.

“International investors have fear, and the international media precipitates this,” Nayar added. “If this began as a U.S.-centric problem, then the U.S. consumer needs to lead its resolution. Somehow, confidence needs to return.”

Tom Hyclak, professor of economics, turned the attention back to the United States, giving a regional and national snapshot of the economy and the early stages of a recession.

“I think if you read the Wall Street Journal recently, it’s hard not to get the impression that there is, in fact, a significant and widespread decrease of economic activity that is affecting all sorts of sectors of the U.S. economy,” Hyclak said.

“So what we could expect to see happening is the declining investment in housing,” he said. “Layoffs will lead to a decline in consumer spending, and the two things together will cause us to slide into another recession, longer than we did in 2001.”

Paul Brown, dean of the College of Business and Economics, led the panel discussion.

Martindale, a one-time financial editor for Business Week magazine and a former institutional bond salesman for Lehman Brothers, will continue to revisit the crisis and discuss current developments during “The Recovery: Understanding the Financial Crisis" Lecture Series. In his upcoming Nov. 12 presentation, Martindale plans to talk about hedge funds.

--Tom Yencho


Posted on Friday, October 31, 2008

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