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American Today

Business and Economics

Professors: $700 Billion Isn’t Just a Needed Bailout. It’s a Smart Buy.

By Sally Acharya

If the $700 billion financial rescue package that passed last night in the Senate doesn’t pass in the House of Representatives, the economy will “get very sick,” professors from Kogod School of Business and the School of International Service agreed at a standing-room only discussion on the current financial crisis in the United States.

“The basic problem here is lack of trust. Whether we can reinstill this trust remains to be seen. But until we have some people standing up and saying rationally, ‘I don’t care what caused the problem, I’m going to be part of the solution,’ it’s not going to be fixed,” said Gerald Martin, Kogod.

It seems like a lot of money, but will turn out to be “a real deal,” said Arturo Porzecanski, an SIS professor and Wall Street economist.

This isn’t like the money that goes into the war in Iraq or entitlements, he explained. “That’s money that never comes back. It’s a bottomless barrel. It serves it’s purpose, I won’t deny it, but it’s money no one expects to come back. This is very different. If they sit on it for a few years, this will come back. I think this will turn out to be one of the best investments in U.S. history.”

Martin agreed. “Our Congress made the mistake of calling this a bailout and using terms like toxic waste. It makes it sounds like it’s a black hole. If the government is to go out and invest in these mortgages, five years from now, 10 years from now, I don’t know what the value will be, but it certainly won’t be zero or we’ve got a lot bigger problem on our hand. This is not a bailout.”

There’s a lot of blame to go around, the professors said. Among the causes some of them cited: the Clinton administration’s push to expand housing options, predatory lenders, an inattentive Congress, and Alan Greenspan, “whose legacy,” Porzecanski said, “is mixed indeed.”

Improved oversight could have lessened the impact. “I don’t think it could have been prevented in any meaningful way, but I think the angle could have been cut down,” said Stephen Kroll, SIS, who has worked on financial matters for the IRS, Department of Treasury and U.S. Senate.

Unfortunately, “Congress rarely acts until the horse is out of the barn, even though it’s been warned beforehand the door isn’t as secure as it should be. Congress was at great fault,” Kroll said.

But everyone who went along for the economic joy ride shares some of the blame, Martin said. “I get kind of upset when I see Congress want to point fingers at each other and then at Wall Street,” he said. “I say, ‘Let’s look in the mirror.’”

If hindsight can improve the regulations crafted in the future, it has little place in the debates in Congress, said Robin Lumsdaine, Kogod, who worked recently with Federal Reserve’s Banking Supervision and Regulation division. “The benefit of hindsight is . . . a luxury we don’t have right now.” She later added, “waiting for complete information can be paralyzing when time is of the essence. We cannot afford to wait for the perfect solution or allow ourselves to be debilitated by that objective.”

“This is a broad financial rather than a more narrow banking crisis,” said Porzecanski.
“It is starting to spill over into manufacturing companies. As we speak, General Electric is struggling to raise money. In this regard, the crisis has acquired a frightening, previously unseen dimension.”

But the financial package can work in part because confidence in the financial strength of the U.S. government remains strong, as witnessed by the continued strength of the dollar, he said. Financial crises become currency crises when people lose faith in a country’s currency, Porzecanski said. “This is not happening here, thank God.”

“If we do not enact the rescue package, we will get very sick in the short term,” Kroll said. If we do, he said, “I think that will stabilize situation, unless the total economy begins to go south. That will generate a wave of second defaults of credit card debt and second mortgages, and that’s much harder to contain.”

But for those with some extra cash at hand, this is a good time to be in the market, said Martin, a professional investor who has managed the financial affairs of several corporations. “There’s some great opportunities out there. A lot of these firms are underpriced.” A wise investor would follow the Warren Buffet philosophy, he said. “Think about the long-term horizon. Buy it when the price is right, and don’t worry about it.”