Duke Economists on Financial Crisis
Three Duke experts in finance discuss lessons learned, regulatory structure
Thursday, September 25, 2008
DURHAM, NC -- Three Duke University economists are available to comment on various aspects of the current financial crisis.
Bill Brown is a visiting professor of the practice at the Duke School of Law. He is a financial services lawyer who has held leadership positions at Goldman Sachs & Co., AIG International and, most recently, Morgan Stanley, where he was global co-head of listed derivatives.
Brown calls the present regulatory structure “ill-equipped” to deal with the current situation.
“The Fed has already had mixed results in regulating combined commercial and investment-banking entities,” he said. “With the possible exception of JPMorgan Chase and HSBC, most of these are beset with the problems that we are currently addressing.
“While we pulled all U.S. banks in under the Fed, we still have a split structure in securities and futures between the Securities and Exchange Commission and the Commodity Futures Trading Commission (CFTC), which regulate securities and futures markets and their participants. These need to be combined, and the CFTC seems to have the short end of the stick.”
Craig Burnside is a professor of economics at Duke and former World Bank economist. Connel Fullenkamp is an associate professor of the practice in Duke’s economics department.
For government and business leaders attempting to stabilize the nation’s economy, Burnside and Fullenkamp offer these four lessons from previous economic interventions:
-- There is no way to avoid a painful process of replenishing capital, even after failing mortgages and other bad debts are removed from the market. This was the case in the U.S. after the savings and loan crisis of the late 1980s.
-- Governments and central banks around the world will need to coordinate their efforts to bail out financial markets or else multi-national companies will take advantage of differing regulations among countries.
-- Assuming the U.S. Treasury is able to buy up bad mortgage-related debts, it will need to be judicious in how and when it sells those securities back into the market. It may have to accept the market’s harsh judgment about the value of the securities. After the East Asian crisis of the late 1990s, the Thai government canceled some auctions of the loans and properties it acquired from the banks because the prices offered for these assets were very low.
-- Any reasonably well thought-out government intervention is better than shutting down the entire banking system. During its crisis in 2001, the Argentine government effectively closed its country’s banks for more than a month by severely limiting people’s ability to withdraw deposits. This was the worst possible response because it locked up nearly all economic activity.
