McCombs School of Business Dean Tom Gilligan (left above) hosted a lively discussion on the current economic crisis threatening America’s financial stability as well as the global economy. Just as Congress moved to pass a $700 billion taxpayer-funded rescue bill, finance faculty Laura Starks (center), Stephen Magee, Sheridan Titman, Jay Hartzell, Michael Brandl (foreground) 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 of Texas at Austin.
Watch the full video of the forum. (WMV)
Watch a clip.
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 Oct. 3.
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.”
14 responses so far
1 David // Oct 3, 2008 at 6:21 pm
Otter: I think that this situation absolutely requires a really futile and stupid gesture be done on somebody’s part.
Bluto: We’re just the guys to do it.
D-Day: Let’s do it.
Bluto: LET’S DO IT!
2 Reuben McDaniel // Oct 5, 2008 at 9:47 am
This was a great forum. I learned a lot about the situation and I was pleased that there were thoughtful differences of opinion. The McCombs School should be engaged in the world and this was a good example of how to do this with class and scholarship. Very refreshing.
3 Nicholas Vaughan // Oct 6, 2008 at 11:05 am
The Bail-Out stinks of 9/11 and our reaction to those that caused us (everyman) harm. Surely something has to be done- but with all our sophistication and technology, it seems the only thing without an evolution is our greed, perhaps it is devo. I would love stability but I am not sure one week is enough time to devise a rational plan long term.
4 Prabhudev Konana // Oct 6, 2008 at 6:24 pm
It was a nice panel discussion with substance and humor. Enjoyed hearing this.
But, we come back a full cricle. Bail out or no bail out has become an ideoligical war and not about economic reality. Surprisingly, the only thing that extreme right and extreme left have agreed ever is to thrash this bail out. Either one provides a solution to this crisis other than to say let the market resolve itself. We are already seeing the effect worldwide since bail out plans will (may ?) take effect several weeks from now.
Interesting questions - what are the implications for business school education? Why have finance and accounting become more complex than rocket science?!! Apollo 13 rescue mission now looks like trivial
5 Out // Oct 7, 2008 at 3:04 pm
Why was there only one woman on this panel? Is it because there is a disproportionate number of men on the faculty?
6 Jerry // Oct 7, 2008 at 5:05 pm
As a former student of Brandl, I respect him and his view points. I do wish he would take a stand though. In class, he was good at showing different sides of every issue. But when the economy is facing crisis, you have to decide - “Bailout or No bailout”. If you don’t like the bailout, give some good reasons and tell what you would do otherwise to instill confidence and get us back on track. And/or what would you do in the future to prevent a repeat of history. Most of all though, how do we regain stabilization NOW?
7 Michael Brandl // Oct 8, 2008 at 2:04 pm
Below is a reprint from my latest Macro Update. If interested you can join via UT Lists.
This is in response to my former student “Jerry” who posted a response on the McCombs Today blog. “Jerry” wants me to “take a stand” on the bailout and to “tell what you (meaning me) would do otherwise to instill confidence and get us back on track. And or what you (again, meaning me) would do in the future to prevent a repeat of history.”
Okay Jerry, for what it is worth, here are my thoughts. (Disclaimer: these are my thoughts alone and not reflect those of The University of Texas at Austin or the McCombs School of Business).
- Bernanke, the Fed and the Treasury have to make it clear where the “bailouts” are going to stop. This will help to put a floor under the financial markets and decrease uncertainty. They need to be more transparent and clear as to who will be and who won’t be saved. The piecemeal approach they are following is not working. Also this “drawing of the line in the sand” should be coordinated with policymakers in other OECD countries as well as Russia and India. Notice, I deliberately left out China.
- Structuring the bailout as buying of assets was a mistake. Instead the Treasury should have injected capital into the banks and taken an equity stake in return. This would have punished stockholders in these firms by diluting their ownership stake. This would also give the Treasury power in setting executive compensation at these firms. Is this socialism? No, it is a step in internalizing the fiduciary responsibility these firms have to the broader financial markets and economy. The current “leaders” of these firms have demonstrated they are incapable of performing this role satisfactory.
- The Treasury should be buying the mortgages of people and families who were truly victims and there are many. But, the Treasury should not be using taxpayer money to bailout real estate speculators or those who should have know better as to what they were getting themselves into with these sub-prime and Alt-A mortgages. But how does the Treasury make this distinction? They need to set up some system, with oversight, to do this. A mortgage-based RTC is what is needed.
- Since the bailout has been structured as it is, Paulson should have named someone to run it, and the buying of bank assets, who has a great deal of experience and credibility. Potential names include:
Bill Gross, Chief Investment Office at Pimco, who the Washington Post described as “the nation’s best-known bond-fund manager.”
Paul Volcker, former Chairman of the Board of Governors
Don Powell, former head of the FDIC and famed Texas banker
Glenn Hubbard, Dean of the Columbia Business School, former head of the Council of Economic Advisors
So who did Paulson pick? A 35 year old former Goldman Sachs underling named Neel Kashkari. Needless to say, this was not a great confidence building move.
- Once the current liquidity crisis ends the Fed, Treasury and the new President are going to have to put in place measures to ensure this doesn’t happen again. Among the things they need to consider should be:
• Overhaul of the financial regulatory system. Paulson’s idea on this
in the spring was a first (but bad) attempt to do this.
• Ensure high quality regulators. This means paying a decent salary to
attract well educated and trained “bank examiners.” The Fed, FDIC and other regulators need to pay salaries of say $125,000 a year to attract the best and the brightest if we expect them to correctly “oversee”
sophisticated financial firms.
• Establish the “rules of the game” for future bailouts. If any
entity is going to be labeled as “too big to fail” who is going to pay “the price” for the bailout? What will that price be? My suggestion is to do the following: make it clear to the board of directors as well as the executives of financial firms, that if the firm they control receives federal government assistance these people will pay personally. That means, if you run a TBTF firm and that firm requires a government funded bailout, the Federal Government will seize your home, retirement funds, children’s trust funds and demand repayment of your salary for the last 5 years. This is called internalizing the externality on a personal level.
These are only a few of the things that should be done. Here is hoping the discussion continues long after the current crisis ends.
Regards,
M Brandl
8 Goldye E. Levi // Oct 9, 2008 at 8:43 pm
Where does a 81 year old ex-sturdent go the register again?
I had the best instructors. They didn’t give to much BS but the country got away from us in only 8 years.
That’s what happens when the good Texans leave Washington.
By the way your salary cap is to low. That is one of the problems with government today. Let work for say for memberw of congress say $250,000. For other heads of Departments start there and raise up to the Presidends salary of $500,000.
9 Eldho Kuriakose // Oct 9, 2008 at 11:14 pm
The solutions so far have been largely short-term focused. What we need to consider is “what is the core value of fiat currency?”
Consider the following questions:
- In a liquid market for each of the following commodities, if I made $100 profit by:
- selling an oz of cocaine
- selling a high end hand bag
- selling a kW of energy
In which case was wealth created? What constitutes wealth creation for society? What happened to the long term value of the dollar (the currency in which the transaction occured) in each case?
I contend that the surest (not the only) way to create wealth for society is to create more energy with a given amount of resources. The first two commodities (cocaine and luxury) merely transfer wealth around. Energy production creates wealth.
Consider an Currency/Energy (CE) quotient: What is the kW/$ in the US? What is the kW/Yuan in China? What is the spread between the exchange rate and the CE ratios?
As such, the only sure remedy to the crisis is to invest in local low cost energy production, efficient use of existing energy, and innovation to manage energy. The recovery will not occur through consumer spending or creation of jobs that transfer wealth around.
10 In // Oct 10, 2008 at 7:45 am
“Out”, maybe the women were out taking advantage of the drop in the market. It’s not relevant, give it a rest. Why does it always have to be discrimination?
11 Attending TexasEx // Oct 11, 2008 at 2:12 pm
Last time I checked, if you stick your hand on a hot stove, you get burned. equally, if you over-extend yourself financially and life happens, as it will, you stand to lose everything. We are not studying how galaxies bend light here, we are looking at human behavior. I could digress into how this party changed this law or how that party changed this requirement of banks, it’s all useful and it’s all petty. This discusssion, the comments above, and all of the analysis taking place, are needed events to prevent a repeat of this occuring again. However, I haven’t heard of one banker or one investment firm or one mortgage broker that put a gun to anyone’s head in an effort to inhance their decision to sign the bottom line. Above and beyond Capitalism, this country was built on personal accountability when a man’s/woman’s word and hand shake meant something. It is time we all went back to this simple measure of each other. Contracts are useful but would you sign one with someone you don’t trust. Apparently, the answer to this question, when applied to the recent past, is yes.
12 Out // Oct 18, 2008 at 3:02 pm
@ In
Yes, the systematic oppression of the under-represented majority is always relevant.
Thank you for self-identifying as the enemy. You make it easier for us to fight you.
13 Alex Schleber // Nov 3, 2008 at 5:07 pm
One thing that is clear is that current revenge fantasies and scape-goating are not going to get us very far. Behavioral economics has identified these tendencies as instinctive though counter-productive:
businessmindhacks.com/post/the-financial-crisis-and-human-psychology-cutting-off-your-nose-to
14 Alexa Arberry // Nov 6, 2008 at 2:53 am
well you guys
i need help, i ´m not having a pretty clear idea of it…
would the bailout be a solution for this crisis?
i mean it could help right away
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