News Release

Heard on campus – America’s financial crisis

February 9, 2009

It’s an understatement to say that the current economic crisis in America is severe and will have long-lasting impacts, but it’s far from the Great Depression and government intervention is absolutely necessary to come up with a solution to the problem.

Those and other observations were shared Wednesday, Feb. 4 when the Penn State Harrisburg presented the first installment of its spring Current Events Series featuring faculty from the School of Business Administration addressing “The Financial Crisis.”

Assistant Professor of Finance Patrick Cusatis, Associate Professor of Finance Premal Vora, Assistant Professor of Finance Qiang Bu, and Assistant Professor of Finance Ji Wu.

Hosted by the Office of Research and Graduate Studies, the series draws faculty expertise from its depth of academic programming to discuss pressing issues of the day. Associate Dean for Research and Graduate Studies Marian Walters, the series organizer, points out, “Since one of our strengths is that broad range of capabilities, we determined it would be of great value to the college and the general public to organize the series to discuss pressing current event issues.”

The discussion began with a list of events which occurred in the past nine months to cripple the economy – the failures of Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, and Washington Mutual, along with the Detroit automaker woes, the purchase of Merrill Lynch by Bank of America, and the Federal Reserve bailout of AIG.

Cusatis noted that 80 percent of the mortgages in America are not in trouble, but that the 20 percent backed with subprime loans are. “Lending practices were relaxed and the bubble burst,” he said, adding that the low fed interest rate encouraged people to borrow – even if they could not afford the loan.

Among the other observations from the session:

• Commercial banks need help, but Vora questions the wisdom of aiding investment banks. “The financial encouraged investment banks to take big chances to make big money. The Fed in the future must demand more accountability,” he said.
• Bu asked, “Instead of buying debt, why doesn’t the government buy shares and become the owner of a financial institution.” Wu countered, “The government is hesitant to nationalize, but if the goal is to stabilize the financial industry, I don’t see a problem with nationalization.”
• Wu believes the Obama plan will work, but government must look to the long-term. “We will have a huge national debt, higher taxes will follow, and then we will be faced with inflation. The Fed putting more money into the economy will fuel inflation unless it takes money back at some point by limiting lending to banks.”
• To the question of whether the U.S. can spend its way out of the problem, Wu favors a tax cut that is permanent; Bu favors infrastructure enhancement to create jobs, Cusatis laughingly “favors tax cuts that help me.”
• Questioned if there will be more government intervention, Vora says yes because “we are all looking to D.C. to solve the problem; this will likely mean government intervention for the next three to five years.”
• Among the in-house initiatives needed to clean up the crisis, Wu says, “We must count all the bad assets in the U.S. and shareholders of banks must know what the institution owns and make decisions accordingly. Shareholders must monitor managers and boards of directors and demand accountability.”

Cusatis concluded by pointing out that “this is not another Great Depression. In the 30s, the Fed failed to increase the money supply and we have learned a lesson from that. Plus, there was no Federal Deposit Insurance Commission to protect personal investments, the U.S. had a much smaller economy, and there was not a global economy.”