Economists: Tough measures needed to cure economic ills

Oct 07, 2008

(PhysOrg.com) -- An ailing financial industry is going to need strong medicine to pull out of a deepening credit crunch brought on by risky loans and deregulation, Purdue University economists said Monday.

Economists from Purdue's Department of Agricultural Economics, Krannert School of Management, and the Department of Consumer Sciences and Retailing said the $700 billion federal bailout package should provide short-term help for lenders but won't cure the nation's economic ills. They prescribed tighter regulation of the banking industry and derivatives markets, combined with a culture that saves more and spends less.

Philip Abbott, Michael Boehlje, Sugato Chakravarty, Larry DeBoer and David Hummels spoke about the financial crisis during a panel discussion on Purdue's West Lafayette campus.

Despite the governmental intervention, tough economic times are ahead, said Abbott, an agricultural economist.

"We are going to go into a recession, regardless," Abbott said. "It's just a question of how severe and how long-lasting it will be."

If bad mortgage assets were the only problem, $700 billion likely would cover it, Abbott said. But once derivatives are added to the mix, the bailout price tag grows exponentially, he said.

Hummels, a Krannert economist, said Congress acted appropriately by passing financial rescue legislation. He said it was "absolutely necessary" for Washington to remove the bad assets from the balance sheets of major financial institutions because the Federal Reserve would have done it anyway. The issue now, he said, is getting cash flow moving.

"You can lead a bank to liquidity but you can't make them lend," he said.

The bailout plan will be successful if international investors decide the United States is again a safe place to put their money, Hummels said.

"We need to watch foreign investors," he said. "For a very long time now, banks, Asian in particular, have been lending incredible amounts of money to the U.S. economy. We run a current account balance of $700 billion to $800 billion a year, which means that every year our economy has to absorb $700 billion to $800 billion worldwide.

"In fact, the dollar actually rose against the euro in the last few days. I think what we may see over the next coming months is whether Asian lenders would rather pull their money out of euros or pull their money out of dollars, and which one happens more quickly."

Housing markets also need to stabilize, said Larry DeBoer, an agricultural economist. He said markets have been steadily declining since about 2002, but could rebound in the next 12 months.

"It looks like we're about two-thirds of the way back to where we were at the end of 2001 and beginning of 2002," DeBoer said. "At the rate that the real price of housing is declining it will take another year to get back to where we were in November 2001 when the last recession ended.

"If we have a recession, however, people may not be able to pay back their mortgages."

The agriculture industry might be in the best financial shape - for now, said Boehlje, an agricultural economist.

"So far, availability of credit is not a big concern," Boehlje said. "At this point we don't have the freezing of credit markets for the ag sector. The more serious issue for agriculture is the potential recession."

A recession could hurt the sale of agricultural products here and abroad.

On the consumer side, it will be more difficult and expensive to borrow money, affecting everything from big-ticket purchases to paying for college, the economists said. People within a few years of retirement stand to lose more from their retirement savings than those with 10 years or more of employment remaining because younger workers will have time to recoup those lost dollars if the market rebounds, said Chakravarty, a retail and consumer economist.

"Short term bad, long term better," Chakravarty said.

"We've been living beyond our means for quite some time," Hummels said. "Our savings is essentially zero. But the last thing you want in a recession is for people to stop buying cars or couches."

Abbott said there is one bright spot amid the dark news.

"The most positive note I've seen is Wells Fargo and Citibank are fighting it out over Wachovia," he said. "They both want to buy those assets at the fire-sale prices now available."

Provided by Purdue University

Explore further: Engineers develop gift guide for parents

add to favorites email to friend print save as pdf

Related Stories

What the US-China climate deal means to the world

Nov 12, 2014

The world's outlook for reaching a global climate deal next year brightened Wednesday as China and the U.S.—the top two polluters—presented a joint plan to limit emissions of the heat-trapping greenhouse gases that are ...

States ascend into the cloud

Oct 24, 2014

Seven years ago, the state of Delaware started moving computer servers out of closets and from under workers' desks to create a consolidated data center and a virtual computing climate.

EU leaders seek last-minute climate deal

Oct 23, 2014

European Union leaders came under pressure Thursday to strike a deal aimed at bolstering Brussels as a trailblazer in fighting global climate change as negotiations went down to the wire.

NEOWISE spots a comet that looked like an asteroid

Jul 24, 2014

Comet C/2013 UQ4 (Catalina) has been observed by NASA's Near-Earth Object Wide-field Infrared Survey Explorer (NEOWISE) spacecraft just one day after passing through its closest approach to the sun. The comet ...

Recommended for you

Engineers develop gift guide for parents

Nov 21, 2014

Faculty and staff in Purdue University's College of Engineering have come up with a holiday gift guide that can help engage children in engineering concepts.

Former Brown dean whose group won Nobel Prize dies

Nov 20, 2014

David Greer, a doctor who co-founded a group that won the 1985 Nobel Peace Prize for working to prevent nuclear war and who helped transform the medical school at Brown University, has died. He was 89.

User comments : 0

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.