Professors discuss economy

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March 27, 2009

4:28 AM

The economy was front and center last night as five professors from the Mason School of Business explained the causes, symptoms and solutions of the current economic crisis.

The panel, which included professors Richard Ash, John Merrick, Larry Strong, John Boschen and Deborah Hewitt, led the discussion.

The discussion ranged from the condition of the retail market to viewing the situation from a global perspective.

While the panelists conceded that this crisis was indeed a recession and a significant problem, they provided reasons to believe that the worst was over, alluding to similar historical crises.

The panel spoke for about an hour and then fielded questions from the audience. Most members of the audience were adults far beyond their college years.
Boschen explained the cause of the current crisis, blaming it on the real estate market and low interest rates.

“If you bought a house in 2001 and sold it in 2006, you would double your money,” Boschen said, implying the real estate market was a bubble and not a sustainable market.

According to Boschen, in past recessions the real estate market has generally fallen 25 percent. Boschen said that in this particular recession, because the problem originated in the real estate market, the fall will be even greater.

Merrick, speaking on government policy, gave out grades to various parts of the government.

He applauded financial institutions for the March 2008 saving of Bear Stearns, but criticized former Treasury Secretary Hank Paulson and then-head of the New York Federal Reserve Bank, Timothy Geithner for allowing Lehman Brothers to fail six months later.

He also commended the performance of the Federal Reserve in responding to the crisis.

“When the money market was defensive, and no one was buying commercial paper, the Fed bought it,” Merrick said.

According to Merrick, this action and other measures kept the financial system going.

Although retailers had absolutely nothing to do with the current financial crisis, Strong said they are facing the brunt of the decline. 2008 was a disaster for retailers.

Family incomes have not grown over the last decade, but retail sales had been growing steadily, leading many to wonder how this happened.

According to Strong, one possible cause is that Americans were buying products with credit cards. People may also have been refinancing their homes and taking cash out.

Another is option is a discrepancy in Americans’ saving and spending habits. Historically, the percentage of income that Americans have spent instead of saved has varied, never falling below 85 percent.

In May 2008, people spent 96 percent of their income, and saved only four percent, the panel said.
Hewitt spoke on the global impact of the recession.

“The dollar is the reserve currency of the world,” she said. Hewitt also said the dollar has appreciated this year, despite the economic troubles and massive government spending.

“In the long term the dollar will weaken,” Hewitt said. “The United States is losing out in major economic sectors. Economic dominance has been in a slide for about 20 years.”

The panel said they predicted the economy would rebound, at the latest, by the beginning of next year. The recovery, however, would bring major changes.

Economic recessions are not rare things. The panel said there have been 18 banking crises in the world in the last thirty years. According to the panel, between 1973 and 1975, the stock market fell 50 percent and unemployment was at 8.4 percent, similar to now.

The national debt was briefly discussed, but attention quickly tuned to the problem of Social Security.
If all things stand, the panel predicted that the country would be burdened by $55 trillion of social welfare, for which there is currently no plan in place to pay.

This is due to the impending retirement of the baby boomer generation and the general aging of society.

According to the panel, when Social Security was created there were eight working people for each retiree receiving social security. Today there are only four, and soon the ratio could be one to one.

“I visualize each young person entering the work force with their own personal old guy on their back,” Hewitt said, inspiring laughs from the crowd. “Will [a recession] happen again? Absolutely. You can’t change human nature.”

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