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Kristen Cole   Date: 10/6/08

Faculty Economists Address Fiscal Crisis

NORTHAMPTON, Mass. – Understanding the nation’s current financial crisis is not easy for most. To help, three Smith College economists offered a primer on the economy at a forum for students, faculty and staff on Oct. 2.

Click on images to view biographies

Randy Bartlett

Mahnaz Mahdavi

Charles Staelin

The task before the professors of economics – Randall Bartlett, Mahnaz Mahdavi and Charles Staelin – was to define basic economic terms, explain the origin of the current crisis and the fixes under discussion both in the United States and in other industrialized nations.

“Let’s put this in perspective,” Mahdavi told a packed Weinstein Auditorium. “First, we are going to have financial crises in the world ahead and from each one we learn something.”

The current financial crisis is one of several that the United States has experienced throughout the past century, said Mahdavi, citing the 1987 stock market crash, the 1997 Asian market crisis, and the 1998 Russian market crisis. And despite comparisons to the infamous Great Depression of 1929, this crisis does not come close, she said.

While the United States experienced a 30 percent unemployment rate during the Great Depression, the nation is currently at 6 percent and the economy is still growing, she noted.

Factors that contributed to the current crisis included the low interest rates of 2001-04. When interest rates fall, people begin to consider purchasing houses that they could never afford if the rates were higher, Mahdavi said. Banks approve the home loan and then sell it to a third party, essentially spreading the risk around.

“If the homeowner can’t pay, then every borrower along the way can’t pay their lenders,” said Mahdavi. In the end, the financial firms are in trouble.

In this chain of events, said Bartlett, when “faith in the value of assets is lost, then those assets become ‘toxic.’”

And when banks freeze up, no sector is immune, added Staelin, including state and local governments that borrow money to build new schools and repair roads, farms that often borrow heavily to make it through the slow time of the year, and small businesses.

“There is a tremendous amount of hoarding going on now,” said Staelin. “Any bank, any finance agency, is holding onto cash. Under those circumstances, loans start to dry up.”

By approving the $700 billion bailout bill Oct. 4, Congress agreed to replace the “toxic securities” with cash, thus transferring the risk from the banks to the government, noted Staelin. The Emergency Economic Stabilization Act grants the Treasury Secretary authority to buy up billions of dollars worth of troubled assets from ailing financial institutions in an effort to stave off more bankruptcies and provide cash for new loans to ease the credit market freeze-up.

For those in the audience already experiencing effects of the financial crisis, it may or may not be comforting to know that economists believe markets always adjust themselves.

“How long will it take and what will be the damage between now and then,” posed Staelin. “That’s where we are now.”

Another lesson to take away from this crisis, said Mahdavi: Everyone needs to be educated about finances.


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