2008 Headlines
The Financial Crisis: Implications for Washington, Wall Street, and Main Street
Wednesday, October 1, 2008, 5:00 PM - 6:30 PM
Hollis Auditorium, 132 Goldwin-Smith Hall
Sponsor: The Cornell International Affairs Review
This interdisciplinary discussion of the current financial crisis features Robert C. Andolina, visiting senior lecturer of finance at the Johnson School and former managing director at Lehman Brothers; David Easley, Henry Scarborough Professor of Social Sciences, Cornell University Department of Economics; and Professor Elizabeth Sanders, Cornell University Department of Government.
Panel Discussion parts 1-3
Andolina, who spoke first, framed the market environment that led up to the crisis, citing the low interest rates and angst about risk-taking that characterized the markets in 2001. Looking for good, safe returns, funds managers' and other investors' demand for highly rated corporate bonds outstripped availability, setting the stage for a creative new approach that ultimately resulted in the explosion of asset-backed collateralized debt obligations, or CDOs. Bundled mortgages, the most common asset-backed CDOs, were then further pooled and repackaged into increasingly complex structured credit products. When housing prices began to fall, and mortgage holders began to default, confidence in the value of these products faltered. The challenge of valuing these assets accurately combined with their illiquidity made them difficult to finance in the short term money markets, leading to the market responses and adding to the confidence crisis we see today.
Panel Discussion part 4
Noting that the current president's administration has not done a good job of explaining the $700 billion bailout bill Congress is voting on this week, Easley set out to clarify "why we need to do it," and to explain how the paralyzing effect that illiquidity and loss of confidence has had on Wall Street will affect everyone on main street. First, he noted that taxpayers are already on the hook via FDIC for all bank deposits, and now money markets funds, too. Moreover, tax revenues will have to be made up somehow. The bond market is almost shut down, resulting in postponed projects and loss of jobs. The government has promised $200 billion to Fannie Mae and Freddie Mac, an $85 billion loan to AIG, and $29 billion to Morgan Chase for the buyout of Bear Stearns. So already, at the very earliest stages of financial collapse, American taxpayers amassed a huge bill that will only continue to cascade and grow unless we take emergency measures to address it. That's where the $700 billion bailout comes in. The fallout on main street if the failure of confidence continues includes much higher interest rates and increasing difficulty in obtaining mortgages, leading to decreased demand, a continuing decline in house prices, and more defaults. In other words, another self-perpetuating cascade.
Sanders covered the financial crisis from a political perspective. She began with an overview of the financial regulatory system created during the New Deal, and dismantled beginning with President Reagan's administration in the 1980s. Commenting on the deregulation movement 's first big failure (the savings and loan debacle in the early 1980s, which required a $300 billion bailout) , she said, "It didn't teach us a thing about the probable consequences of deregulation." In 1995 the largely Republican Congress promoted a new surge in deregulation, and in 1999 President Clinton's administration saw the repeal of the Glass-Stiegel Act, a multi-faceted New Deal financial law . That was followed by a 2000 law that prohibited federal agencies from regulating some of the very financial instruments at the root of today's crisis. After that, the principle remaining piece of New Deal financial regulation was the FDIC. Referring to Secretary of the Treasury Paulsen's initial, three-page, $700 billion bailout bill as "one of the most astonishing attempts in modern history to expand the discretionary powers of the presidency," Sanders said she believes the revised bill is an improvement, but she's disappointed that there appears to be no attempt to create a new regulatory system now. "Trust can only be restored when there is a new set of rules, " she said.
Luis-Francois de Lencquesaing, president of the Cornell International Affairs Review (CIAR), welcomed the audience. The panel was introduced by CIAR member Francis Pedraza, who also delivered introductory remarks, raising questions about the implications of the crisis and setting the stage for the discussion. Sarah Eversman, CIAR's secretary general, moderated the question and answer session.
An independent student organization founded in 2007, the Cornell International Affairs Review is Cornell's premier international relations-focused, undergraduate think tank, whose members seek to provide a nonpartisan society and forum dedicated to the study of international relations in an increasingly globalized world.
