Economists Address Fiscal Crisis
NORTHAMPTON, Mass. – Understanding
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.
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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
“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