With global financial markets in disarray, a panel of experts convened Monday evening in the Mendoza College of Business for "The Credit Crisis: What it Means for You and the World" to bring clarity to the current crisis and to describe the consequences for both for individuals and the larger system.
Margaret Forster, finance specialist and former principal of Wanger Asset Management LLP, spoke first, summarizing the shifting landscape of 21st century finance and the recent downfall of many of its large institutions.
Formerly, Forster explained, banks provided credit on a stricter and more personal basis. She said, banks would "set the price of loans such that borrowers could pay them back." Bankers would watch their borrowers' behavior closely, ensuring that the process ran smoothly and intervening when necessary. Although this system was stable, banks could only lend out as much money as they held in deposits.
In the new system, according to Forster, banks sell mortgages in the form of "securities" on the financial markets, allowing for a boost in capital throughout the system but also a distancing of borrowers from lenders. When housing prices fell, people began to default on their mortgages and many large financial institutions were left with worthless slips of paper.
She summarized the crisis by pointing out that, "Transactions require trust. Trust is dead."
Tom Cosimano, finance professor and a visiting scholar for the International Monetary Fund, spoke next. As he put it, his focus was on "how the crisis cascades through the economy."
"As the house prices go down, the default rates go up," he said.
He also emphasized that uncertainty is driving the downward spiral of the financial system.
"Trust and lack of trust is essentially causing this to snowball through the whole financial system," he said.
Nelson Mark, Notre Dame's DeCrane Professor of International Economics, put the crisis in historical perspective while criticizing some recently proposed solutions.
According to Mark, what we are currently experiencing is a "credit induced cycle"- not unlike those endured by Sweden, Thailand, Japan and Argentina in recent decades. While those countries all recovered, according to Mark, they "paid for it over the next ten years" with stalled growth.
Mark was also critical of Treasury Secretary Henry Paulson.
"The original Paulson plan was to come in and buy up these bad assets," he said.
On the scale of bad ideas, he said found it worse than the sinking of the Titanic.
He said of Paulson's original plan, "The reason it's worse than the Titanic is that it was sunk before it was even launched."
As the best alternative, Mark praised recent proposals for the government to take direct ownership in failing firms. These plans have much in common with the British response to the crisis.
John Rosenthal, chief executive of the Northern Indiana Region of Old National Bancorp, stressed that consumers should not panic.
"Sorting out fact and fiction is difficult when you're reading sensationalist headlines," he said.
"I think it's important that we hunker down, it's important that we live within our means. I don't think it's a good idea to let fear overrule our intellect."
He ended on an optimistic tone.
"My conclusions are stay patient, don't panic, and stay educated. Use your American ingenuity to solve the problem, which means get out and vote."
Afterward, audience members had a chance to ask questions to the panel.
