News Magazine of the UW Department of Communication
By Honsen Lin
Over investment on sub-prime loans are to blame for the recent economic downturn, said members of a forum on the financial crisis. The panel consisted of three professors associated with the University of Washington and an executive of a bank.
Although each of the forum’s four members disagreed with specifics on what is causing the country’s economic woes, they generally agreed that Fannie Mae and Freddie Mac should not have bought too many sub-prime loans.
Sub-prime loans are loans issued to lower income people who may not be able to pay their loans because they take on too much debt. There is a risk associated with loaning money to such people, which is why they are called sub-prime loans.
However, the government and the banks saw sub-prime lending as a way to increase revenue and provide housing for lower income people.
Dick Zerbe, UW professor of public affairs and professor of law, said, “most of the blame rests of the blame rests not with the market but with government.”
Zerbe believed that Congress put too much pressure on Fannie Mae and Freddie Mac to lower their standards on loans so that housing could become more affordable. He cited greed as one of the overlying reasons why there was over investment in sub-prime loans.
“It really started before 9-11, when the Congress set housing targets for Fannie Mae and Freddie Mac,” said Richard Bennion, executive vice president of HomeStreet Bank. He added that the good housing market of the 1990s caused relaxation of credit lending standards.
Lew Mandell, professor of finance, also blamed the government. Yet Mandell called sub-prime loans “terrific innovations” when they were first enacted, allowing lower income people to take out a mortgage for a house.
Alan Hess, UW professor of finance, listed three reasons why the market is currently in a recession: sub-prime loans were rising, the standards for allowing these loans were falling and Fannie Mae and Freddie Mac were buying the best of these sub-prime loans.
When the housing prices fell and sub-prime borrowers couldn’t pay off their loans, many of the banks went bankrupt.
Members of the forum discussed a variety of economics issues related to the financial crisis.
When an audience member asked if there was anyone else besides the government to blame for the recession, some of the panelists said part of the blame resides with the banks themselves, as well as housing speculators.
Housing speculators bought many new houses and sold them off when housing prices rose. However, when the housing prices went down, the speculators sold off their houses and left the housing inventory on the market.
Forum members also discussed the purpose of the government’s recent bailout of AIG.
Dr. Hess said that the banks don’t really help each other out financially, so the government needs to bailout major credit agencies. Bennion added that the bailout is designed to restore confidence in the credit markets.
Throughout the gathering, forum members repeatedly kept a light mood, making jokes and eliciting laughter from the audience. They also reassured the audience that the standard of living will bounce back after about five years.
However, Dr. Mendel cautioned that the recession would not be a “V-shaped recession” where standard of living pops back to its pre-recession heights but a “L-shaped recession” where standard of living stabilizes at about the recession level.
The forum, which convened on Monday, is the first of two. A second forum discussing what people should do in the economic crisis will be held next Monday.
