Published: October 08, 2008 09:10 pm            

Sycamore Showcase panel: Plenty to blame for economy

TERRE HAUTE — There is plenty of blame to go around for the financial turmoil on Wall Street and elsewhere, according to panelists at a discussion Wednesday hosted by Indiana State University.

Regulators, CEOs, borrowers, securities dealers and others all had a role in bringing about the problem, the panelists told a group of about 60 people at the Sycamore Showcase at Noon in the Hilton Garden Inn.

“Everyone has blood on their hands,” said Lakshmi Bala, assistant professor of finance at ISU.

Despite the recently approved $700 billion financial rescue package and steps by the Federal Reserve and other central banks to cut interest rates, stocks fell sharply Wednesday on the New York Stock Exchange and other trading floors. The Dow Jones Industrial Average lost 189 points, or 2 percent.

“At this time actually what we have is a panic,” said Tarek Zaher, a professor in the College of Business at ISU. The global move to cut interest rates was a “step in the right direction,” he said, adding, “We should be optimistic and not afraid.” If too many people jump off the side of a ship, the ship will turn over, he said. “We should not scare ourselves too much,” he said.

While some of the seven panelists stressed the need for confidence to restore stability to the markets, others said the crisis is larger than simply a lack of confidence.

“We have a substantial crisis,” said Bob Guell, an economics professor at ISU. Much of the problem stemmed from loans being made to people who could not afford them, he said. “This is a disastrous and easily predictable mistake that some people called a long time ago,” Guell said, adding that he warned several years ago that allowing people to buy a home with no money down was a “really bad idea.”

Many people bought homes well above their price range because they assumed they could refinance and that housing prices would continue to rise, Bala said. Now many people are stuck with more debt than their homes are worth, she said.

“The cause [of the crisis] is that housing prices got really out of hand,” said professor John Conant, chairman of the ISU Economics Department. In California in 2006, average housing prices reached five-and-a-half times the median Californian’s income, he said, adding that if that had happened in Indiana, the average Hoosier home would cost $360,000.

When the dot-com bubble popped, prices of tech stocks were allowed to fall, Conant said. Now, in the wake of the housing bubble, politicians are talking about putting a “floor” under housing prices by buying mortgages, he said. “That’s an attempt to keep prices way above what they should be,” Conant said, adding that allowing housing prices to fall will be difficult, “but if we don’t, we will not get out of this.”

Housing prices are falling, said Jack Tatom, director of ISU’s Networks Financial Institute, adding that foreclosures may not peak until next year. “We’re going to need a lot of patience,” he said.

Guell said that some politicians blame the crisis on so-called “market-to-market” accounting rules. “That’s not really right,” he said. This is not just an accounting problem, he said.

However, Bill Minnis, president of Citizens Bank in Terre Haute, said market-to-market accounting, which requires financial institutions to list assets at present-day values, can make a bank look “very unsound very quickly.” Minnis added that, despite the Fed’s efforts to reduce interest rates, bank loans are becoming more expensive because of increased risk. “Uncertainty is not something that banks jump all over,” he said.



Arthur Foulkes can be reached at (812) 231-4232 or arthur.foulkes@tribstar.com.

        

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