International studies professor Ilene Grabel led an informal discussion about the current financial crisis on Wall Street Friday.
She also said that in the event of a large scale, “freefall in the value of the dollar,” the problem might be transmitted globally more so than it already is.
About 65 students, both graduate and undergraduate, sat in on parts of the discussion that was held at the Josef Korbel School of International Studies.
Grabel criticized policy makers and their decisions during the ongoing crisis, calling the actions by federal regulators an “ad hoc incoherent responses.
She said policy makers are acting “baffled” by events that were clearly predictable.
During the question-and-answer segment, Grabel was asked to describe the best and worst-case scenarios.
In the worst case, she thought the $740 billion bailout might be inadequate to encourage lending.
It might calm the market for just a few days or it might create a domino effect where other sectors, such as airlines, come forward also requesting a bailout.
In the best case, inflation might deflate the value of loans, and the U.S. would hobble along in a low growth environment as the stock market falters.
“Small investors tend to sell at the wrong time,” Grabel said, “but big investors buy at ‘fire sale’ prices.”
Grabel also agreed that the first draft of the bailout bill failed to address the structural issues at fault for the crisis.
“I’m disappointed that reform is not [one of the] sweetener[s],” she said in reference to the second bailout bill that Congress passed last week and President Bush signed into law.
Another sector that might be in trouble is the auto industry, according to Grabel.
Students expressed concern over the vague and estimated costs of the bailout in government talks, however Gabrel seemed certain that more accurate numbers would not become available. Accordign to her, if better tools existed to determine the size of the problem were available, the U.S. Treasury Department would have used them.
She also discussed the difficulty that has been encountered with valuing mortgage-backed securities that many financial institutions hold.
These Collateralized Debt Obligations (CDOs) are a real problem, she said, since they allow financial institutions to bundle underwritten loans and sell them to other banks or investment underwriters. These bundles then get put into larger bundles and sold again.
Bad loans that are not likely to be paid back make it into the bundles. Thus, no one knows the true worth of these bundled assets.
“Some of these loans were not risk rated or were improperly rated low risk,” Grabel said.
Business both large and small may lower their production, investment, and employment.
Grabel then discussed some possible consequences of the bailout, including an increased inflation effect and the suspension of badly needed federal reforms.
“We could see [the financial crisis] crowding out other projects like health care reform because so much money is being spent [on the bailout].”
The bailout may also cause changes in financial regulation in the U.S. and damage the U.S.’s popularity as a financial model.
Grabel said that there are two major factors that led to the current financial crisis: deregulation of worldwide financial markets and monetary policy.
Deregulation began in the mid 1980s, and induces financial innovation, where companies try to create new financial markets that were prohibited before.
Poor monetary policy was also cited as a problem.
Monetary policy is the control of the interest rate by the Federal Reserve.
From 1987 onward, the U.S. had a highly expansionary monetary policy, with a low interest rate, put forward by Alan Greenspan to respond to a minor stock market crash and low confidence in the U.S. economy.
The first signs of trouble appeared in July 2007, when many people began to default on their loans. However, at the time, the crisis appeared to be a minor economic upset, according to Grabel.
