Experience Stern | News & Events

The event was part of Stern's new "Market Pulse" series, introduced by Dean Thomas Cooley to tackle pressing global issues affecting business and society. In this breakfast forum, Dean Cooley convened industry, media and academic thought-leaders to discuss how we got into the current credit crisis and how we might get out of it.

Video:
Get the Flash Player to see this player.


Moderated by David Backus, Stern's Heinz Riehl Professor of International Economics and Finance, the panel included Lionel Barber, Editor of the Financial Times; Robert Litterman, Chairman of the Quantitative Investment Strategies group of Goldman Sachs Asset Management; Nobel Laureate Robert E. Lucas, Jr, an economist at University of Chicago; and Nouriel Roubini, Stern Professor of Economics and International Business. Their interchange was attended by alumni and students of the School, their guests and the press.

Litterman remarked that it wasn't surprising that we missed signals indicating a crisis. Crises by their nature are unusual events, which happen infrequently and are in large part unpredictable. On the current situation, he noted that financial models show a relatively short recession with a strong recovery at the end of 2008. He also warned that the current spike in inflation could easily lead to a prolonged inflationary period, as it did in the 1970s.

Barber suggests that the scale of the crisis represents excessive risk-taking, causing a crisis of valuation that warrants a re-examination of the US's regulatory framework. He cautioned against adopting the British model of "financial super-regulator," reminding the audience that the Financial Services Authority had great success until it failed dismally with its first stress test, Northern Rock. Without a mandate for intervention, the Bank of England wasn't in a position to take the reins.

The Federal Reserve's dramatic rate cuts mark an overreaction and conflict with Chairman Bernanke's earlier promised inflation targeting strategy, according to Lucas. He felt that one of the most serious issues is that we take for granted that it's the Fed's job to resolve the issues of the financial system. He expressed concern, however, about introducing new regulations designed to solve old problems. Any such regulation brings with it an incentive to find ways around it, and there's little you can do about that without stamping out innovation altogether.

Roubini predicted a long, deep U-shaped recession, viewing the situation as a systemic financial crisis. He argued that the US is in the middle of the worst housing recession since the Great Depression, and if owners continue to walk away from their homes, credit losses could reach a $1 trillion or more. In addition, consumers, who account for 70% of GDP, can no longer use their houses as ATM machines. Moreover, oil costs have reached new heights, there is a credit crunch and consumer confidence is at its lowest level since 1973. Roubini concluded that the key lesson learned is that non-banks are subject to the same risks as banks, and are systemically important, suggesting regulatory oversight in which the supervision of banks and non-banks is virtually the same.

Questions from the audience covered regulation, inflation, auction rate securities and "green" products.

This latest Market Pulse event, "Economic Meltdown: Restoring Confidence in Credit Markets," was co-presented by Stern's Alumni Council Finance Committee and the Salomon Center for Research in Financial Institutions and Markets.