2008 Archive

Panel on Financial Crisis Draws Overflow Crowd

By Andrew Cohen

[View video of the panel discussion  here.]

Before a packed house Thursday at Booth Auditorium, five UC Berkeley economic experts offered many contrasting opinions on the world’s current financial crisis.

But they agreed on an ominous forecast—that the markets are in dire straits and that government-proposed solutions seem insufficient to fix them. Berkeley Law professor Aaron Edlin minced few words in his opening remarks about U.S. Treasury Secretary Henry Paulson’s initial bailout proposal.

“It was absolutely astonishing to read Paulson’s plan,” he said. “Ed Liemer of UCLA said when he read it he thought it was an internet hoax. The idea that Paulson would say, ‘I want $700 billion to spend on anything I want, and there will be absolutely no review of any kind,’ was absolutely breathtaking.”

After rejecting a bailout bill on September 29, Congress passed a revised rescue package Friday—the day after the panel discussion—that President Bush quickly signed into law. The panelists agreed that a recession was imminent regardless of legislative action, and that certain systemic market problems would likely remain.

Each scholar gave a 10-minute presentation on an aspect of the crisis before taking questions as a group. Interim Goldman School of Public Policy Dean John Quigley chronicled the housing meltdown, Haas Business School professor Nancy Wallace discussed root causes of the crisis, economics professor J. Bradford DeLong outlined macroeconomic policy components involved, professor of economics and political science Barry Eichengreen described international impacts, and Edlin spoke on regulatory reform.

“What’s at stake here is everyone’s employment and prosperity,” said Eichengreen, “not simply the bonuses and golden parachutes of bankers.”

Sobering Data

DeLong warned of eight million workers potentially losing jobs as construction projects dwindle and the tourist industry declines. He noted that $300 billion flowed through financial markets to U.S. nonfinancial businesses during the second quarter of 2007, but that figure shrunk to $150 billion during the second quarter of this year.

“And we had even less in the third quarter of 2008,” DeLong said. “I think we might have zero in the fourth quarter. This is not a good situation to be in.”

Edlin, who last week authored an article called “Quashing the Financial Firestorm” in The Economists’ Voice, recommended launching a recovery plan with unlimited deposit insurance and ongoing access to funds to prevent bank runs by panicked customers.

“It’s one thing to be insured and know you’ll get your money back in six months or nine months, but no one really has a clear idea of when they’ll get their money back,” Edlin said. “There should be some way to guarantee continued access and make people know it. The advantage of that is every CFO and treasurer around the world would not need to have seven bank accounts and be constantly monitoring them thinking ‘I’ll pull out on the slightest rumor.’ ”

Edlin worked at the White House from 1997 to 1998 as the senior economist covering regulation, antitrust, and industrial organization for the President’s Council of Economic Advisers. A professor of law and economics at UC Berkeley, he anticipates the need to move toward more involuntary actions—such as expedited bankruptcy—if the economy continues to deteriorate.

“The idea is to take institutions that are in trouble or might be in trouble and involuntarily swap debt for equity as a way to recapitalize them,” he said. “To me the major problem with that is if you’re a debt holder and you think you’re in such a company where this might happen, you’re going to flee, which is no different from a run on the bank. So I think you can only do it with long-term debt, where people are essentially stuck, to avoid that problem.”