Darden School dean: Worst of crisis over

By Brian McNeill

Published: October 15, 2008

The worst of the nation’s economic crisis may be over soon, according to Robert F. Bruner, dean of the Darden Graduate School of Business Administration at the University of Virginia.

“We may be on the outbound side of the eye of the hurricane,” Bruner told a crowd Wednesday at UVa’s Miller Center of Public Affairs. “Whatever remains in this crisis may just be from the spiral that hits us on the way out. Let’s hope that’s true.”

Many economists, Bruner said, believe that the nation’s economy is solidly in a recession and that it will continue through April. He believes it may last a bit longer than that.

Yet Bruner — who is co-author of the 2007 book “The Panic of 1907: Lessons Learned from the Market’s Perfect Storm” — suspects that the “extraordinarily expensive” actions being undertaken by government and financial leaders are likely to prevent the economic crisis from growing terribly worse.

Congress has authorized spending up to $700 billion to bolster struggling financial institutions, though Bruner predicted it will actually be “north of a trillion” or perhaps even $2 trillion.

As much as $250 billion of the bailout package will be put toward injecting capital into American banks. In return, the federal government will acquire partial interest in the financial institutions.

“By any standard, we are living in interesting times,” Bruner said.

Bruner believes that there is no arguing with the fact that the market has crashed.

“We have to acknowledge that a crash has occurred in the stock market,” he said.

As of Wednesday morning, he pointed out, the stock market was down 40 percent from its most recent peak.

A spark ignites all economic crises, Bruner said. In the panic of 1907, the spark was the San Francisco earthquake that created a liquidity crunch. In the current crisis, it was the realization in 2007 that subprime loans were defaulting at a shocking rate. That led to the realization that many subprime loan packages — held by most major financial institutions — were worth less or, possibly, worthless.

Bear Stearns Co. announced in summer 2007 that it was facing enormous losses because of the subprime mortgage meltdown. Similar financial companies followed in its wake like dominoes, culminating in the current crisis of today.

Moving forward, Bruner said, the incoming Congress and next U.S. president will need to enact sweeping financial reforms to prevent such a crisis from reoccurring.

For one thing, he said, they will need to add more transparency to the markets by strengthening reporting requirements and increasing the banks’ capital adequacy requirements.

One of the most significant challenges associated with the current financial crisis is that many Americans have seen their retirement savings lose a colossal amount of value, said Herman Schwartz, a UVa professor of international relations and author of a paper titled “It’s More Than Just Subprime: The Housing Crisis, Global Capital Flows, and American Power.”

In the wake of the Great Depression, Schwartz pointed out, the American economy prospered in large part because companies offered employees high wages and pension benefits. During the 1980s and 1990s, however, wages for most Americans stagnated and pensions largely disappeared in favor of retirement benefits, such as 401(k) and IRA accounts, in which the risk is shifted from the employer to the employee.

Now, when the market tanks, it can wipe out the safety nets for senior citizens, he said.

David Leblang, a UVa professor of politics and co-author of “Democratic Politics and Financial Markets: Pricing Politics,” said that one lesson from the current financial crisis is that the dream of home ownership might not be the best course for everyone. Those who received mortgage loans they could not afford, he said, should never have been allowed to purchase a house.

“I wonder to what extend we have gotten too consumed by this notion of home ownership,” Leblang said.