Playing the credit crisis blame game
In a clear sign that the public hungers for a better understanding of the financial crisis, a free series this month on the topic, sponsored by the University of Washington Alumni Association, has reached attendance capacity. However, you can view the upcoming forum via live streaming video or a TVW broadcast.
The first panel discussion in the series, “How Did We Get Here, and What Does it Mean?” was moderated by KUOW Weekday host Steve Scher and featured Dick Zerbe of the Evans School of Public Affairs, Lew Mandell and Alan Hess of the Foster School of Business, and Rich Bennion, executive vice president and residential lending director of Seattle’s HomeStreet Bank. Scher explained that they would be concentrating on the causes and likely effects of the crisis, leaving possible solutions to the next forum on Nov. 3.
The consensus was that there is plenty of blame to go around. All participants in the mortgage markets played a part, from the federal government down to individual homeowners, but the root cause was a massive lowering of underwriting standards, which Zerbe characterized as having been “under attack from virtually every branch of government.” Mandell and Bennion noted that this was originally done to meet affordable-housing targets, but that the post-9/11 flood of cheap capital into this country — from the Fed’s rock-bottom interest rates as well as creditor nations like China — brought speculators into the mix, including individuals who bought homes on terms that only made sense if prices continued to rise. Hess pointed out that the total number of subprime loans had tripled from 2003 to 2007, and that over half of them were cash-out refinances, not initial home purchases — not exactly what Congress had in mind when they pressured Fannie and Freddie to lower their standards. Add to this what Bennion called a “disconnect between the borrower and the lender,” in which most originators no longer have any “skin in the game” but collect their fee and pass on the risk to holders of mortgage-backed securities of increasingly dubious quality, and the inexplicable behavior of the large institutions who, according to Mandell, “should have known enough not to be eating their own cooking,” and you have the current mess.
What could happen as a result? It’s already begun: consolidation of the banking system to the point where Zerbe thinks there may be antitrust concerns; a further fall in the Seattle real-estate market, since, as Mandell noted, the conforming-loan ceiling is close to the median home price, and jumbo mortgages are becoming impossible to get; trouble in the world of higher education, where tuition is “funded by massive amounts of leverage” (watch for consolidation among small institutions there, too); and a general reluctance to lend, which impacts everything from people’s ability to buy cars to their employers’ ability to make payroll.
Questions from the notably unpanicked audience ranged from the political (would Obama or McCain do a better job at getting us out of this? summary: the importance of that choice is “overstated,” though ending the war would make more funds available for domestic recovery) to the definitional (how are interest rates set? what’s the deal with credit-default swaps?). But one, from a student of Hess’s, had to do with how much we could blame our current situation on the phenomenon of short-termism. Hess thinks it’s a factor, but is also nothing new. Mandell and Zerbe seemed rather pessimistic, therefore, about our ability to avoid future bubbles, one of which, Scherr suggested, might be in green technology. Mandell said “the memory of the American public is getting shorter and shorter,” and pointed out that the tech bubble wasn’t even 10 years old, while Zerbe held that, as far as regulation goes, it wasn’t a lack of quantity, but a lack of quality that sank us, and we will “probably get it wrong next time too.” He did think there would be marginal improvements, and Hess attempted to close the evening on a positive note by saying that “things aren’t that grim” in that the market’s price-to-earnings ratio is actually near the historical average of about 15. “Of course, it could go down,” he couldn’t help adding, and indeed, according to Yale economist Robert J. Shiller, the S&P’s P/E ratio has gone as low as 4.78 in 1920, and as low as 6.6 as recently as 1982.
So, what should we do now? That’s in fact the theme of the second forum, which will be hosted by former mayor Norm Rice and feature Yu-Chin Chen of the economics department, Karma Hadjimichalakis of the Foster School, Wolfram Latsch of the Jackson School of International Studies, and local economic analyst Dick Conway. I wish Mandell were going to be there, too, as I see he is a “leading scholar in the financial education movement” who is willing to criticize our current lackluster efforts (Word file) in that direction. Watch for a summary of the Nov. 3 forum and an update to my Oct. 8 article on the role financial literacy should play in the recovery sometime during Election Week. (Let’s hope we know who the president and governor are by the time it runs.)