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November 10, 2008
Getting into, out of economic meltdown

By Allison Shirreffs

Years of shortsighted decisions dug the hole the U.S. economy finds itself in, and it will take long-term leadership to climb back out, according to a Goizueta Business School faculty panel.

Moderated by Susan Gilbert, associate dean and director of the Evening MBA Program, the Oct. 30 panel discussion “The Economy: What Happened and What’s Next?” touched on the makings of the mortgage meltdown, its effect on the credit and stock markets, and what it will take for the economy to regain its footing.
How did the U.S. economy arrive at this point? “Excessive

leverage,” notes Jim Grissett, adjunct professor of real estate, noting that loans of government-sponsored enterprises like Fannie Mae and Freddie Mac were leveraged at a 40 to one ratio.

Public policy over the last two decades encouraged such excessive leverage, says Greg Waymire, Asa Griggs Candler Professor of Accounting.

“This is not your typical financial market meltdown,” explains Dean Larry Benveniste, Asa Griggs Candler Professor of Finance. Benveniste believes the challenge facing the country and its politicians is more fundamental than a market correction. “This is about the bigger picture and the excesses of our country,” he says.

With a gross national debt over $10 trillion, the U.S. far outspends what it earns, and other countries finance that deficit.

As of June, U.S. consumer debt stood at $2.6 trillion dollars. The panel, which also included assistant professor of finance Tom Smith, said consumer saving is the wisest choice for the long run, but when consumers save, their spending slows and the market contracts and the global economy slips.

A more classical free market approach would be to let the contraction occur and the market adjust, but for several decades, the government has “protected” financial markets by keeping interest rates low. “If we continue to do that, we’re putting off worse pain,” says Benveniste.

Over the last year or two, the weak dollar has brought export growth robust enough to offset the weakening housing market. The recent boost in the dollar’s value could reverse that trend and be another drag on the economy.

But, notes Ray Hill, assistant professor of finance, the good news is India and China will see their economies slow somewhat, but not much. “They’re still a good aggregate source for demand,” says Hill.