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Panel Detail:

Tuesday, April 28, 2009
11:00 AM - 12:15 PM

What We've Learned From the Credit Crisis

Moderator:

Charles Van Vleet, Director, Portfolio Investments, United Technologies Corp.

The credit crisis was not U.S.-centric but rather a global event with an excess of liquidity followed by a massive contraction, according to Bruce Kasman. The lessons learned from the crisis are evolving in real time, and Kasman thinks the perspective a year from now will be different than it is today.

In hindsight, it was apparent that companies had too little equity, James McCaughan said. Financial services firms were placed under a great deal of pressure to lever up their balance sheets to generate returns in line with their peers. The combination of available debt and public market pressure led to excessive leverage levels. McCaughan said that this run-up in debt levels was a matter of human behavior and that cheap, available debt in an inflationary environment was the root cause. One key lesson learned from this cycle is that debt markets drive the equity markets although review of historical data indicates that this lesson is not new.

Gary Shilling blamed speculation in part for the credit crunch. Shilling′s key lessons learned were that regional economies cannot be decoupled in a global environment and that future cycles will continue to be global in nature. He cautioned that the dynamic between inflation, deflation and debt levels would be important to watch for the duration of this cycle.

James Gellert discussed the rating agencies at length and their role in credit cycle. Although not solely to blame, the rating agencies were enablers in providing excessive credit to the market and "there has not been a significant focus on accuracy with the ratings," he said. Gellert also brought up the faulty incentive and compensation structure between the debt issuers and the agencies. He said more competition is needed in ratings to provide an alternative model to S&P, Moody's and Fitch. "In terms of the credit rating agencies, not a lot new has been learned from the credit crisis, but a least people are aware of the problems," Gellert said.

The panelists discussed the savings rate of U.S. households at length, and the panel agreed that savings would continue to be higher than historical levels. The economists disagreed slightly on the magnitude of savings, with estimates ranging from current levels of 4 percent to 5 percent for the foreseeable future to increases of 1 percent per year for 10 years.

Alexander Friedman discussed the impact of the cycle on the developing economies of the world and the tangible ramifications of decreased aid to the poor.

The panel seemed to develop a consensus that the U.S. economy will experience flat to low growth over the next three to five years, but the speakers stopped short of providing predictions. All agreed that governmental policy moves create a great deal of uncertainty in the market and discourage investors and lenders from putting capital out due to confusion as to what may happen next.

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