Students and faculty filled Salomon 001 to maximum capacity - and then some - on Friday afternoon to hear four Brown economics professors and a former Lehman Brothers quantitative researcher sound off on the current financial crisis and the recently passed $700 billion government bailout.
During the "Roundtable on the Current Financial Crisis," the panel of five explained the origins of the crisis, warned the audience not to scapegoat Wall Street bankers and expressed its concerns about the ability of the bailout to resolve the problem.
Economics professors Peter Howitt, Ross Levine, David Weil '82 and Ivo Welch shared the spotlight with Matthew Rothman, the former global head of quantitative equity strategies at Lehman Brothers Holdings, Inc. Rothman now works in the same position at Barclays Bank PLC in the wake of Lehman's collapse.
Welch introduced the panelists. Each spent about 10 minutes discussing his views on the economic turmoil and bailout. They opened the remaining 30 minutes of the roundtable to questions from the audience, which ranged from specific questions about mortgages to broader inquiries about the global effect of the crisis.
The audience members greeted the roundtable with frequent, vigorous applause and laughter at the speakers' jokes. The economics department and Department Undergraduate Group hosted the event.
Students' curiosity was met by a panel with primarily bleak opinions to share. Among the grim words of Levine's peers, his were the most optimistic.
"I think we're going to be okay," Levine said. "Just a little poorer." He added that he foresaw neither a depression nor a "financial Armageddon."
Howitt and Welch painted far less rosy pictures.
"This is perhaps the most dangerous crisis since the Great Depression," Howitt said. "Ultimately, the position of the U.S. dollar is at risk." Howitt also predicted a global recession and the shrinkage of the world economy.
Welch echoed Howitt's concerns, adding that the current crisis is an "incredibly difficult mess to untangle."
The entire panel expressed doubt - or at least ambivalence, on Rothman's part - in the ability of the government bailout to completely resolve the issue. The prospect of increased government regulation in particular worried the economists.
"Yes, there are market failures," Levine said. "But there are a lot more government failures. ... I am not confident about relying on the angelic interests of government systems." He concluded that the bailout would fail, adding that he had "no idea" how the government calculated the $700-billion sum required for the bailout. He predicted that the money would be insufficient for the government's plans, which he said may require at least an additional $700 billion.
Welch said that the idea of leaving politicians to untangle the mess was "scary" and that "what we want is efficient or good regulation," which he said was "very hard to come by."
But the panelists agreed that enacting the bailout, however flawed, was still better than doing nothing.
"The freezing up of the financial system would be economic Armageddon," Weil said, noting that one of the lessons from the Great Depression was that the monetary system must stay intact.
"We all agree that keeping the credit systems functioning should be vital."
The professors spent most of their time untangling the reasons behind the current fiscal woes.
Levine, Howitt and Weil attributed the current crisis to excessive borrowing, particularly in the mortgage sector. Weil cited the debt from risky mortgages, the housing bubble in the 1990s, the contraction of the financial sector, banks' solvency and liquidity problems (and consequent lack of trust in banks) as reasons for the financial crisis.
Weil discussed companies' "massive extension of credit" and "ridiculously lax lending standards" that allowed people who should not have been receiving mortgages to take them. Many were sub-prime mortgages - risky mortgages, some made without documentation requirements - that should not have even been lent out in the first place. Thousands of home buyers defaulted on their mortgages and were unable to pay back their loans.
This is a particularly tricky problem to remedy, Welch said, because it is not clear how these debts have been divided up in the market. "I don't know who owns my mortgage."
This uncertainty may contribute to a "cascade effect," which Levine explained as a situation in which banks are first reluctant to loan, forcing owners of firms, short of funds, to sell their equipment and ultimately to fire workers.
"We have failed to make adequate provisions for the future," Howitt said. He blamed the current problem on excessive expenditure of income and not enough saving, and added that "in order to accumulate capital, you've got to produce it."
The implications of actions taken today can affect students' lives for the next 10 years, Levine said.
But panelists warned against solely blaming Wall Street for the current crisis. Levine added that people must "drop the distinction between Wall Street and Main Street," calling each "two sides of the boulevard called the economy," a metaphor that elicited laughter from the audience.
"We kill Wall Street; we kill Main Street," Levine said. "Save the cheerleader; save the world. Something like that."
As a former head of Lehman, Rothman said he had "a lot of emotion, not a lot of perspective."
He said that the mistakes leading to the current troubles were made by "people, not by villains," as he mentioned that it was easy to vilify hedge funds and "the ex-CEO of my company."
When a student hesitantly asked Rothman about the atmosphere at Lehman during the crisis, Rothman answered, "There was disbelief that this was actually happening."
"There was sadness, anger," he said. "No one really believed that was happening."
Students said they were drawn to the event for a variety of reasons. Because the economic crisis is such a "focal point" in the upcoming election, Joel Cohen '10 said he hoped the roundtable would give him more insight and a better understanding of the presidential candidates' views and prescriptions for the economy. Lured to the event by Howitt's announcement in his macroeconomics class, Cohen, an economics and philosophy concentrator, said he decided to attend the event because he wanted to receive an "overview from someone who's studied the economy for many years."
Prachi Jalan '11 said she hoped to leave the roundtable with a better understanding of the crisis, an idea of possible solutions and information on how it would affect the job market.
Jalan was not alone in her interest: Many of those who arrived a minute late to the event were forced to sit in the aisles.
