Your crisis questions: an economist answers

on October 12, 2008

By MELANIE MASON, MARTIN RICARD and KRISTINE WONG

Oct. 6–Bailouts, credit crunches, bank buyouts. In these shaky economic times, it seems like every day there’s a new phrase to learn and another concept to wrap our heads around.  For a breakdown of what is going on in our faltering economy, we turned to Martha Olney, an adjunct professor of economics at UC Berkeley.  Olney, who won the university’s Distinguished Teaching Award in 2003, sat down with us on Monday to answer questions from North Oakland residents – and a few of our own as well.

According to Olney, the root causes of the financial crisis lie with the subprime mortgage meltdown and the credit crunch in the markets. For a summary of the crisis, click here. Watch Olney explain where we stand now.

What does it mean for one bank to be bought by another bank?  If someone hears that their bank was bought out, what should he do?

It means that the second bank has acquired all of the assets and all of the liabilities of the first bank.  A bank is a series of assets, of things that it owns, which are the loans that its made, and it is a series of liabilities, which are the things that it owes to others, which is primarily the deposits that it has received from its customers.  So when somebody buys another company – doesn’t matter if it’s a bank buying a bank, or an airline buying and airline, or me buying some company on Telegraph Avenue – what it’s doing is purchasing their assets and taking responsibility for their liabilities.  So when whoever it is winds up buying Wachovia – probably Wells Fargo, possibly Citibank – then Wells Fargo will acquire all of the assets – so all of the loans that Wachovia has made, all of the buildings Wachovia owns will become the property of Wells Fargo – but they also will take responsibility for all the liabilities, which is to say all the deposit accounts, so our money at Wachovia.

If the bailout is actually a loan of sorts, how will the government (and the taxpayers) be paid back? – Lianne Campodonico, Piedmont

What does this mean for Social Security?

Social Security should be fine.  Unlike what the Republicans wanted to do, we did not put Social Security in the stock market.  If we had privatized Social Security, and put people’s Social Security in the stock market, then in fact, people would be in deep, deep doo-doo.  But, we had the wisdom to not take such risk with that plan. The revenue for Social Security payments comes from taxes that workers pay.  And so, your Social Security’s fine, because Social Security is not in the stock market.  It shouldn’t be, and it hasn’t been.

Business has been very slow. Will this bailout help increase consumer confidence and spending? And what will happen to loans for businesses to grow? – Alma Tassew, business owner on Telegraph Avenue

What impact will [the crisis] have on universities?  Will people stop going to college?  Will they have to get regular jobs for a while? – Jeff Haley, UC Berkeley graduate student

Actually, usually in a downturn, college attendance goes up.  When it’s harder to find jobs, people go back to school.  And part of the answer depends upon what the universities do.  In the Great Depression, what UC Berkeley did was the Dean of Students made a commitment to the student body that no one would be forced to drop out of Berkeley for a lack of ability to pay.  So the university was able to cobble together cost reductions and scholarship funds to fill in the gap for anybody who wasn’t able to pay, so that enrollment stayed steady.  I have no idea, because I’m not in the conversations, whether or not in the current environment we’re in the position to make a similar commitment.

There’s a lot of hysteria, but how bad could the situation really get? Is another Great Depression a realistic possibly?

We’ve heard a lot about regulation, or the lack of it, playing a role in this crisis.   What is the history of de-regulation in recent years?

The de-regulation of financial institutions begins in the late 1970s, because we had an extremely regulated financial industry from the New Deal until the late 1970s.  It picks up some steam in the 1980s under the Reagan and Bush administrations.  Then I think it would be more fair to characterize what’s happened more recently, in the last decade, as financial innovation that went around the existing regulations and there was no regulation that was put in place to try to put a curb on it.  The history of financial institutions is that it’s always this game: there’s financial innovation to try to make profit and then there are financial regulations put in place and then there’s financial innovation to get around those regulations…And so it’s always this game of trying to get the regulation ahead of the rapid change of innovation.  That part of the game wasn’t happening in the last few years.
What role did Fannie Mae and Freddie Mac have in this crisis?

Who is going to jail and WHEN and can it be SOON and please will they have a lot of rock smashing to do? – Ashley Swift, Temescal

There’s not a lot of criminal activity in this.  There’s not a lot of people going to jail.  Most of this story is not about fraud.  Most of this story is about the rapid increase of housing prices, coupled with deregulation, which allowed some crazy lending behavior to take place.  And those housing prices – there was just no way they were going to continue to increase at that pace.  When that bubble started to get deflated, this thing was going to come to a crashing halt, and that’s what we got.  So, sorry, not a lot of people going to jail.

Are you scared?

I’m getting there.  I hadn’t been, and today I’m a little more scared than I had been.

Why today?

Because the financial markets around the world are imploding.  I don’t think I had been sufficiently aware of how global this was.  I actually dug out the retirement statements this morning to see how heavily we were in stocks…not so good.

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3 Comments

  1. The financial crisis: a summary | Oakland North on October 7, 2008 at 10:08 pm

    […] Americans have seen their financial credit system crumble. According to U.C. Berkeley economist Martha Olney, the root cause of this crisis was the millions of subprime mortgages that went into default over […]



  2. […] See the original post here: Your crisis questions: an economist answers […]



  3. len raphael on October 12, 2008 at 2:06 pm

    What will the range of consequences be for Oakland’s deficit? It’s currently pegged at about 50Mill, and that’s based on assuming no drop in sales tax or business tax collections, about a 50% drop in real estate transfer tax, and a modest drop in real estate taxes, no increase in borrowing costs.

    Wouldn’t you think the actual deficit will be substantially higher and probably for next 3 to 10 years?



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