Faculty, staff and alumni discuss nature of financial crisis


In general this is a cyclical phenomenon; this is not the Great Depression.” Paul Isaac ’72, managing partner and investment officer at Cadogan Management, uttered these words of optimism to a packed Chapin audience during a panel on the global and domestic ramifications of the financial crisis on Thursday night.
In addition to Isaac, College alumni, faculty and staff contributed to the panel discussion entitled “Cycle or Spiral: Financial Markets in Crisis.”
The session was moderated by Stephen Sheppard, professor and chair of economics.
Isaac set the general tone of the panel, calling the present market crisis “a cyclical phenomenon.” He believes that the current market downturn is the result of a buildup of dangerous business practices developed in the absence of any major crises. “The financial world was like a forest with a large amount of lush undergrowth,” he said. “There were a lot of regulatory structures- that have turned out to be fundamentally unstable.”
Isaac also criticized the government’s intervention, or lack thereof in the crisis, claiming that “what we’ve had is 18 months of ‘Whack-a-Mole’ regulatory practices.”
The second panelist, James Lee ’75, gained his economic expertise from 34 years of work at Chemical Bank and J.P. Morgan. He currently serves as vice chairman of the product of the two institutions’ merger, J.P.Morgan Chase & Co., and as the co-chairman of its investment bank.
Lee agreed with Isaac that the crisis has been largely exaggerated by major media outlets.
“Welcome to the business cycle,” he said, before highlighting the inevitability of economic downturn. Lee described a series of financial crises just like this one he has seen in the last thirty years.
“A business cycle is made up of an up-part and a down-part. This is the down-part,” he said.
However, Lee does not believe that this crisis is over. “The economy is in bad shape, not as bad as its going to get I’d guess, because the consumers are basically on strike.” In his opinion, two things need to happen before the economy can begin to recover. First, banks need to obtain more capital. And second, they need to become convinced that providing funds to their clients is not a risky endeavor.
Gerard Caprio ’72, professor of economics was the third panelist. He was the first to hit on the crisis’s international nature. “Financial globalization is four or five times greater than what it was in 1980,” Caprio said.
He pointed to the United States as the origin of many bad mortgages, which firms in Europe then purchased as a result of low interest rates that were prevalent earlier in the decade.
Caprio said that an abundance of liquidity spurs investors to take more and more risks, causing a form of financial overextension.
He also echoed Issac’s sentiment, noting problems with financial regulatory practices. “Financial innovations are way ahead of financial regulation,” he said, adding that this position was one that that presidential nominee, Barack Obama, shares.
Caprio’s colleague, Kenneth Kuttner, a former assistant vice president of the Federal Reserve Bank of New York addressed the role of his former employer in this economic crisis. “The Fed is undoubtedly the center of the storm,” Kuttner said.
The Federal Reserve has been acting as a “lender of last resort,” using its essentially unlimited funds to lend money to firms in distress. In doing so, “Bernanke and Paulson are attempting to stave off the collapse of the system.”
Since September, the Federal Reserve has loaned an unprecedented one trillion dollars to the private sector, a move that is “off the charts in terms of scale and scope,” according to Kuttner. The Federal Reserve’s actions have “prevented collapse thus far,” but Kuttner emphasized that its actions cannot solve the problems inherent in the system in terms of regulation and transparency.
The final panelist was Collette Chilton, the head of the Investment Office at the College, which is responsible for managing the endowment. She laid out two objectives her office tries to achieve: to maintain liquidity and to maintain the endowment for future students. “The thing to remember is that the reason there is an endowment and an investment office is to finance the College.
The endowment is like a bank for the College,” she said, adding that her office’s goal was to “support the College today and onward.” Chilton also stressed that her office did not plan on drastically changing its investment strategy despite changing market conditions.
Throughout the discussion, all panelists involved touched on the same theme. Despite the dramatic economic downturn, conditions will eventually stabilize and improve.

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