Faculty: More than enough blame to go around for economic woes

Gainesville, Fla. – More than 700 people, worried about the current economic crisis, gathered on October 2 to hear what a panel of Warrington faculty saw as the “how, why and what happens now?” in the economy. About 500 in attendance had to watch the panel discussion on television from overflow rooms. The discussion was also aired on the College’s website live via webcast and a podcast of the event has had more than 800 hits so far.

The expert panel was moderated by IPO expert Jay Ritter, Cordell Eminent Scholar in Finance, and included other authorities in their respective fields; David Denslow (Distinguished Service Professor of Economics), Mark Flannery (BankAmerica Eminent Scholar in Finance), Mike Ryngaert (Graham-Buffet Professor of Finance), and Doug Waldo (Associate Professor of Economics).

A general consensus among the panel was a mixture of short memories, over-exuberance, overreaching, and a lack of oversight, could be to blame.

The housing bubble created an environment in which “homebuyers made inflated purchases thinking that housing prices would never go down,” said Ryngaert. “People’s memories probably don’t go back far enough,” he said.

Flannery suggested that, at the same time, large amounts of money was being managed by young people who, accustomed only to “good times” on Wall Street, made risky investments, expecting the party to never end.

“They don’t remember the last recession, and they don’t know how badly things can go,” he said.

The members of the panel recounted the economic mistakes of recent years, such as skyrocketing home prices just as baby boomers were set to retire and risky loans that were issued—either as those in charge looked the other way, or failed to recognize a bubble was forming. Dropping home prices and rising foreclosures meant banks had bad investments on the books, thus making financial institutions gun-shy about extending even more credit before the situation was resolved and putting the greater economy at risk.

Flannery, who has been a consultant to the Federal Reserve Bank in Atlanta, said, Fed chairman Bernanke and U.S. Treasury Secretary Paulson fear, above all, that inaction would put all borrowing at risk, making it difficult for the average person to get loans, for cars, homes or anything else. Now the U.S. Congress is considering a $700 billion for the financial system.

“That’s where the $700 billion [bailout] idea came from — looking into that abyss and not wanting to go there,” he said.

Economists on the panel members said it was unclear whether the bailout would be the panacea lawmakers hoped for.

“The government could end up making money, meaning the true cost could be around $250 billion,” said Denslow, “but much will depend on how the government values so-called toxic assets. If they go too high, it’s going to end up costing the taxpayers a lot; if they go too low, it’s not going to work.”

Moving quickly to address the problem was a positive according to Waldo, who said that Japan’s hesitation to act in the early 1990s caused a “lost decade” of low growth.

“That’s a lesson to not put things off,” he said.

Negative forecasts related to the housing market have dominated the news for many months and, in recent weeks, each day has brought another alarming financial report, leaving some analysts to suggest that this is the worst economic situation since the Great Depression. With so many statements being issued daily from Washington and Wall Street, the average person is left with many questions. The panel presentation gave individuals a better understanding of how the current situation will affect the national and global economy.

Susan Masterton (BA ’75, JD ’84) a UF alum in Tallahassee, said (in an e-mail) to Dean John Kraft, “I was fortunate to be able to listen to the live webcast. I just wanted to say thank you! for putting this together and to compliment the panelists on their remarkably interesting and informative presentations. To provide this relevant and timely opportunity to the public, and to make it widely available through technology, represents to me the purpose of higher education. The quality and value of the presentation made me proud to be a Florida Gator (and it’s nice sometimes for that feeling to arise from something other than football).”

Panelists saw a few positives to the crisis; for one, first-time homebuyers now face more reasonable prices, said Ryngaert, and Waldo said, thanks to its flexible labor market, he thought the U.S. would be quicker to recover than most countries. But, in the end, they all agreed that so many missing variables made it difficult to predict whether the rescue plan would work.