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Economic talk dissects nation’s crisis

By : Eric Coker

The government’s $700 billion rescue plan has had some positives, an economic expert and 1974 University graduate said at a Homecoming Weekend panel.

“The two-and-a-half page proposal, doubled-spaced, wide-margin, big font, almost instantly stopped the panic and that alone was a huge success,” said Jim Wilcox, who is now Kruttschnitt Family Professor of Financial Institutions at the Haas School of Business at the University of California-Berkeley.

Wilcox was part of an Oct. 17 panel featuring Economics Department members who addressed the credit crisis.

Wilcox said the government plan also should be cheered because it has opened debate about how the economic problems can be solved.

“The next program is really going to be expensive because it’s either going to come under this administration or it’s going to ‘Job 1’ of the next president: What are we going to do about these mortgages?” Wilcox said. “Are we really going to pony up $400 billion to $500 billion to buy down these mortgages in one way or another?”

Some of the potential options that have been floated, Wilcox said, include mortgage balance reductions, rate reductions via refinancing and tax credits for homebuyers in 2009.

“It’s going to get expensive because we’re talking about millions of mortgages that could be changed by thousands of dollars,” he warned. “You’re into a really large number.”

But Wilcox pointed out that taxpayers did agree to spend what would now be $250 billion to “sweep up the S&L mess” of the late 1980s.

“Are we going to pay $500 billion to sweep this (crisis) up?” he said. “My guess is we will grudgingly do so. There’s not a lot of alternative. It is expensive and painful, but not impossible.”

Wilcox gave audience members a short history of how the country ended up in the economic crisis.

An increase in the worldwide supply of funds to be invested, combined with stimulative monetary policy in the United States and lax lending, led to housing prices bubbling up this decade. As home prices eventually fell, loan losses loomed at financial institutions and created uncertainty about the losses.

“The conventional wisdom used to be among lenders that people will give up their cars, credit cards, vacations, but they won’t give up the keys to their house,” he said. “That’s not the pattern we’ve been seeing lately.

“Our faith has been shaken in how much we understand borrower behavior and these house prices.”

Financial uncertainties became so pervasive that institutions were afraid to lend to each other, Wilcox said. That lending then moved from long-term to as short-term as overnight.

The next domino was concern that financial institutions wouldn’t be able to pay people back. A money market mutual fund run began last month, as more than $100 billion was withdrawn from funds over a few days, Wilcox said. This, he said, led to the government’s involvement.

“It was that run that just scared everybody,” he said.

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Last Updated: 10/14/08