money

Buffalo State Economics Experts Discuss Wall Street Woes

In the midst of an unfolding economic crisis of epic proportions, Buffalo State faculty members from the Economics and Finance Department discussed its underlying factors, potential consequences, and possible solutions during Tuesday’s Bengal Pause. Students, faculty, staff, and reporters filled every seat in Bulger Communication Center East to learn more about the current troubles on Wall Street.

Ted Schmidt, department chair and associate professor, moderated a panel of four professors, each of whom presented a different aspect of the crisis.

Theodore Byrley, associate professor, explained how cash flows from prime and subprime mortgages are used to create collateralized mortgage obligations that are at the heart of the current government bailout debate. He cautioned attendees to look beyond the proposed $700 billion bailout to the much larger, shakier, and rapidly-growing market of credit default swaps, which stands at $42 trillion.

“What happens when the $700 billion runs out?” Byrley asked. “This is not a crisis about money; it’s a crisis about confidence.”

Joëlle Leclaire, assistant professor, argued that deregulation of the banking industry in 1999 and rising household debt contributed to the current crisis. She said that banks were once rewarded for providing more loans and more opportunities for home ownership, but that selling off loans in bundles created trouble for everyone when some high-risk borrowers could not repay their debts. Further compounding the problem, she said, is the fact that homeowners now rely on home appreciation values in lieu of personal savings.

Leclaire said that while a bailout would offer stability, having no bailout could actually present a “golden opportunity.”

“We could instead rebuild from the bottom up with a new public works program,” she said. “It would create jobs so that people could pay for their homes.”

Xingwang “Kevin” Qian, assistant professor, told attendees that other factors besides “greedy” Wall Street CEOs and government deregulation policies contributed to the crisis. He examined how huge sums of foreign capital drove down the interest rate in the United States and enabled more high-risk loans but led to dried-up credit and insolvent banks. Qian said the effects of the crisis are already trickling down to other countries, with Europe having recently pumped hundreds of billions of dollars into global credit markets in an effort to mitigate losses.

Bruce Fisher, visiting professor and director of the Center for Economic and Policy Studies, reminded attendees that because Wall Street is in New York City, there could be serious repercussions for the rest of New York State, including a lack of funding for pensions and Medicaid. Fisher said that diversifying the state’s economy with more jobs in tourism, construction, and public infrastructure would keep people employed—and in turn, keep people buying things and thereby drive the economy. He predicted the state will enact a “millionaire’s tax” by year’s end to address the budget deficit.

Schmidt ended the discussion by expressing hope for quick government action.

“Unfortunately, if the government does nothing about Wall Street’s problem, everyone will get hurt,” he said.

A podcast of the full 72-minute presentation is available online.