The first-ever President's Forum on Critical Issues, moderated by President Richard Brodhead, convened Wednesday afternoon to get to the bottom of Wall Street's swift downward spiral, a phenomenon that has average Americans and brilliant economists alike scratching their heads.
Nearly 1,000 students, faculty and staff members filled Griffith Theater and the first level of Page Auditorium to hear professors Craig Burnside, James Cox, Cam Harvey, David Rohde and Katherine Schipper present their views on the financial upheaval and pose questions of their own.
"Although I have been alive for more than a day or two, I don't think there has ever been quite such a turbulent time in my lifetime," Brodhead said. "A university can't step forward to solve the problems of this time, but this is a place of education."
Harvey, J. Paul Sticht professor of international business, explained that although there are a number of reasons for the crisis, many bankers' current woes can be attributed to greed and a misunderstanding of the fundamentals of risk management. Financiers urge their clients to structure their portfolios so they will survive a worst-case scenario, but many failing banks ignored their own advice.
Investment bankers typically bet more than even the most steely gambler is willing to wager, said Burnside, a professor of economics. Although these bets enhance returns when markets perform well, they also amplify losses if markets sink. For example, a bank that bets double its net worth would be wiped out completely by a 50 percent drop in the market.
If the government is burdened with the financial outlays of American International Group, Freddie Mac and Fannie Mae, then the expense will be $1 trillion, or about 7 percent of the gross domestic product, Burnside added.
"It's not clear if this is going to weaken the dollar because we don't know the exact fiscal costs yet," he said. "But this certainly isn't going to make your European vacation cheaper any time soon."
Hours before the Senate passed a bailout bill, Brodhead asked the panelists how they would counsel a legislator who called them as their "last best hope" from Capitol Hill.
Schipper, Thomas F. Keller professor of accounting, prescribed minimal political risk, simplified credit derivatives and strictly enforced regulations to remedy the nation's financial ills.
"That's not a glamorous answer, but I'm an accountant so that's OK," she noted.
Senior Packy McCormick said the forum was perfect for students perplexed by the latest headlines.
"I think a lot of kids are reading the news and not fully grasping what's going on," he said. "[The professors] each took a separate angle, and when the different pieces came together they painted a great overall picture."
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