Economists Gather, Talk About Markets

A dozen distinguished alumni from the University of Michigan Department of Economics gathered for a panel discussion yesterday at Lorch Hall to discuss the current financial crisis. The focus of the panelists’ remarks as well as the questions from the audience mostly reflected the title of the event, “Upheaval in Financial Markets.” That is, the emphasis was on “markets” in the biggest sense: the home market, the capital markets, the credit market, the global market. All of the markets that are now in crisis as a result of questionable mortgage lending practices that gave many people access to buying a house, who would have otherwise not been able to contemplate such a purchase.

But one audience question came from a voice for the “local market,” specifically the “ordinary folks who have one of these mortgages who are suffering.” “What are the techniques,” wondered that voice, “that are available to keep people in their houses? … Or do you believe that they should be out of these houses? This is a social disaster in our community.” The voice posing the question would be familiar to observers of local Ann Arbor affairs.

The voice belonged to Jean Carlberg, currently serving on the planning commission and formerly representative to city council for Ward 3 (the seat where Stephen Kunselman currently serves and likely to be filled by Christopher Taylor in November). In response to Carlberg, panelist Peter Borish, an early ’80s UM graduate and now director of Pali Holdings, Inc., offered his view that keeping people in their houses was a “strong public policy interest.” Panelist John Sweetland, a late ’50s grad and now president of The Winsford Corp., said that while everyone liked to talk about Wall Street and Main Street, we should not forget Mulberry Street, “where people actually live.” Sweetland said that the bailout package was merely a first step and that more was needed.

The bailout package itself passed the house during the panel discussion with a vote of 263 to 171, a fact relayed mid-discussion by ’80s grad Michael Beauregard, now partner with Huron Capital Partners, LLC, who was monitoring the vote via a handheld electronic device. It validated the view expressed 10 minutes earlier by Peter Hooper, a ’70s grad and now chief economist with Deutsche Bank Securities, who had declared, “It will pass. I said it last week and I’ll say it again. It will pass.”

In response to a question about the possibility of the $700 billion bailout having an inflationary effect due to an increase in the money supply, panelist David Berson, former chief economist with Fannie Mae, began his answer cautiously. He wondered if one of his doctoral qualifying exams from the early ’80s might hang in the balance and be retroactively rescinded. A gentleman in the front row, presumably a member of Berson’s PhD committee, nodded, but in a way to suggest he was kidding.

Near the beginning of the proceedings, Berson had provided a bit of non-verbal comedy, when he concluded his brief intro of himself with “former chief economist with Fannie Mae” and let the hint of a grimace cross his face, then gingerly passed the microphone to the right. But with one hand holding the mic, Ralph Heid, an early ’70s grad and now vice president with Comerica Bank, used the other hand to pat Berson on the shoulder, saying, “Timing is everything.”

So will the $700 billion have an inflationary effect? Nobody seemed to think so. For one thing, the money is not a “transer of funds,” but rather the “purchase of assets” – the questionable mortgages that were backed by various venerable financial institutions. It’s not an increase in the money supply. Instead, it amounts to a temporary increase in liquidity, which the Fed needs to monitor to make sure that it steps in at the right moment to decrease liquidity. If it steps in too late, that could lead to inflation. Right now, though, gold is still outperforming silver, which is indicative of a non-inflationary environment. Without this increase in liquidity provided by the bailout, credit would remain frozen – right now banks are not lending each other money even overnight. And the effect of that will soon begin to be felt by non-bankers, namely people trying to get car loans or student loans.

In fact, the expectation is that deflation, not inflation, will predominate, and Peter Borish pitched that to the assembled young students in the auditorium as boding well for them (in part, because it gives them easier access to retail goods), but not so well for folks who were looking to retire at age 55 and circle the globe on their amassed wealth. Panelists spoke of the bailout having only a very slow effect and everyone seemed to think that the country can expect to experience at least a moderate recession.

So how are those “ordinary folks” who own a mortgage they can’t afford supposed to navigate through the recession? One panelist stressed that we need to make sure they had jobs. No concrete ideas were brought forth on how to do that.