Is this recession different?
Thursday, January 29, 2009
William Hudson, associate professor of finance, insurance and real estate, noted that the credit default swaps that helped trigger the recession were sold as insurance, but lacked the cash reserves that back up traditional insurance.
ST. CLOUD, Minn. - Richard McDonald said the phrase three times to the Ritsche Auditorium audience of 200: "This one feels different."
The assistant professor of economics and co-author of the St. Cloud Quarterly Business Report was one of five St. Cloud State professors who collaborated in a public forum on the economic recession that began nationally in December 2007 and hit locally last fall. View a video clip from the forum.
McDonald suggested the recession may not be the cyclical kind that can be fixed with fiscal and monetary intervention.
"Is there something structural going on here that makes us have to think about this in a deeper way than we're usually inclined to think, as economists," McDonald said. "We're scratching our heads on this one."
The mortgage lending, for example, will need major changes. The current model, as detailed by Steven Mooney and William Hudson, has been devastated by deceptive lending practices, the unregulated securitization of mortgages and lending to people with poor credit, among other problems.
Hudson, an associate professor of finance, insurance and real estate, used editorial cartoons to make some of his points.
One cartoon caption read: "As an alternative to our traditional 30-year mortgage we also offer an interest-only mortgage, balloon mortgages, reverse mortgages, upside-down mortgages, inside-out mortgages, loop-de-loop -- I've never heard of that one -- and the spinning double-axle mortgage with a triple Lutz."
Mooney, who holds an endowed real estate professorship at St. Cloud State, also used humor. He described the depressed real estate market this way: "Is this a buyer's market or a seller's nightmare? And, the correct answer is 'Yes.' "
McDonald said the financial sector will lay off millions of workers. And some of those layoffs, he suggested, may be permanent.
Wall Street must stop encouraging market volatility as a tool for making money and big banks must look to small banks as models of best business practices, according to McDonald.
Several of the professors raised the specter of deflation -- a nasty economic situation in which price decreases lead to lower production, which, in turn, leads to lower wages and reduced demand, which leads to further decreases in price. One of the psychological spurs to deflation occurs when consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity, triggering a deflationary spiral.
Over the last 50 years the Federal Reserve, the government body that helps manage the economy, has successfully inflated the economy each time deflationary worries have arisen. This recession, however, the Federal Reserve seems to be running out of options, McDonald said.
"For the first time in my life I'm concerned that they're not going to be able to do it," McDonald said. "I'm concerned that deflation is something we're going to have trouble fighting."
Ming Chien Lo twice complained that he has not heard new ideas -- from the political left or right -- for coping with the economic crisis. He is an associate professor of economics.
Of the eight recessions since 1960, the average has been 11 months long and two longest lasted 16 months, according to King Banaian, chair of the Economics Department and co-author of the St. Cloud Quarterly Business Report. The current recession is in its 13th month, nationally.
Banaian suggested a recovery might begin this summer, but cautioned there would likely be another six to nine months of weak employment behavior in the economy.
"If this one feels worse than usual," said Banaian, "that's because it is."
The forum was sponsored by these student organizations: Economic Association, Investment Club and American Marketing Association. The principal organizers were students Danielle Wicker, Chad Bermel, Brandon Dufner, Alex Reilly, Kyle Swanson and Sarah Stangl.
St. Cloud State University