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Brandeis University's Community Newspaper — Waltham, Mass.

Deans discuss economic crisis

Published: September 26, 2008
Section: News

In the midst of a national financial crisis, Heller School Dean Lisa Lynch and International Business School Dean Bruce Magid discussed the domestic and international effects and made predictions about the type of economy the new president might face.

Two hours before President Bush was to make a speech from Capitol Hill addressing the status of the economy on Wednesday, a large crowd of students, professors, faculty, and members of the public attended a forum at Brandeis on the “Financial Crisis at Home and Abroad—Imagining the Next President’s Agenda.”

Lisa Lynch, former Chief Economist at the U.S. Department of Labor, outlined the origins of the problems that the economy has to cope with today. She described how in recent years there has been an increase in home purchasers using more than one mortgage and buying homes with only a little money down. Also, in 2004 to 2006 there was a swell of subprime mortgages.

Subprime mortgages are offered to buyers with low credit ratings and who are riskier investments. They are presented at an initial rate, which is increased after two to three years. In order to increase capital, some companies securitized the subprime mortgages by bundling the loan with others and then selling off the interest to various investors.

Lynch explained that borrowers were able to afford payments on their loans because house prices were increasing. However, after house prices reached their peak in 2005, they plummeted and people struggled to make the payments. Lynch said, “it was easier to give the keys of the house to the bank,” but since the loans were securitized there was confusion about who would actually receive the money.

Foreclosure rates grew, builders stopped constructing houses, and construction workers were unemployed. By summer 2007, mortgage defaults grew by 79% over the previous year and American Home Investment Corp. filed for bankruptcy. Lynch stated that, at the time, people still thought that it was a “limited problem.”

During the last two weeks, the government has assumed control of the American International group, the investment bank giant Lehman Brothers filed for bankruptcy, and the Bank of America acquired Merrill Lynch.

Lynch detailed the effects of the turmoil on Wall Street on the economy, which include a higher unemployment rates, an increase in inflation, and lower consumer spending.

Then, Lynch commented on the government’s proposed $700 billion dollar bailout plan. The proposed plan would allow the government to buy distressed mortgages with money from taxpayers.

She said that if the bailout plan simply addressed the “illiquidity triggered by sheer panic” then the government would probably not need to spend the full $700 billion. If the plan confronted the “insolvency of financial institutions,” however, the outcome would be more uncertain.

Lynch said that the real challenge facing the presidential candidates is that by the time they are in office “the amount of money is going to be in short supply.”

Bruce Magid, former managing director and senior vice president of Bank of America, discussed the impact of the troubled economy on the country’s role in the global market.

He stated that in the best-case scenario, the current bailout plan could keep the world out of a steep recession. However, the U.S. would most likely spend the next one to two years experiencing flat growth and then two to five years underperforming. Magid suggested that during this time the U.S. should concentrate on structural reform of the financial markets.

Magid claimed that the U.S. would no longer be a world leader, but instead would be among peers. “[It will] be hard to lead by stick alone…Diplomacy might make a comeback.” He expressed concern about the country’s weak relationship with Venezuela and Brazil and whether the U.S. can compete in a climate of geopolitical tension. Magid proposed that a way out would be through innovations and investments in the future.

He listed steps that the U.S. could take for a brighter economic future, which include investing in higher education, rebuilding an aging infrastructure, increasing investments in clean energy and life sciences, and regaining a moral compass.

Magid said that in the coming years Americans could become “less affluent, but more spiritual.”

Afterwards, David Warsh, economic journalist and former writer for the Boston Globe, moderated a series of questions directed to the deans. Warsh asked what the future of the economy in Massachusetts and New England would look like.

While Lynch, who is a member of the Governor’s Council of Economic Advisors for the Commonwealth of Massachusetts, acknowledged that the state has seen a decrease in home prices and increase in unemployment, she stated that it does not look as bad in Massachusetts as elsewhere. The reason, Lynch said, is because the “state is very interested in the future and has invested in higher education and in life sciences.”

Nevertheless, Lynch indicated that there is still great inequality, which the state has to do more to correct, and has to cope with an aging workforce. In regards to the nation as a whole, Lynch warned that if the government “can’t un-stick the panic problem [the nation] will go into a deep and profound recession.”

Magid presented a slightly optimistic view of the future of Massachusetts’ economy. He stated that if the state pursues local global strategies, Massachusetts’ might be in the position to “outperform.”

Then, members of the audience were allowed to direct questions to the panel. An international student explained how students who came overseas to study at Brandeis may have to return home after they get their degree because of the lack of working opportunities.

Lynch reassured the student that the “best thing you can do is get an education” and that she should prepare to work in a global market. “We are not the only land of opportunity,” Lynch said.

In response to the last question posed to the panel regarding long-term goals the government should try to achieve, Magid stressed the need to “figure out a way to prioritize and invest in the future” and to have a national dialogue where “everything is on the table.”

Later that evening on national television, President Bush emphasized the need to pass the $700 billion dollar bailout plan to bring the economy out of a crisis and invited the presidential candidates John McCain and Barack Obama to “help speed discussions toward a bipartisan bill.”