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Panel Detail:
Wednesday, April 29, 2009
11:00 AM - 12:15 PM
The Rise and Fall of the U.S. Mortgage and Credit Markets Roundtable
Speakers:
James Barth,
Senior Finance Fellow, Milken Institute; Lowder Eminent Scholar in Finance, Auburn University
Alan Boyce,
CEO, Absalon; President, Adecoagro
Barry Eichengreen,
George C. Pardee and Helen N. Pardee Professor of Economics and Political Science, University of California, Berkeley
Glenn Yago,
Director of Capital Studies, Milken Institute
Moderator:
Rick Newman, Chief Business Correspondent, U.S. News & World Report
"It's premature to talk about green shoots and financial healing," said Barry Eichengreen of the University of California, Berkley, noting that global demand for American exports does not point to a economic turnaround and that recapitalization of the banks is being done more slowly than is optimal for recovery.
James Barth of the Milken Institute outlined the major factors that led to the crisis in the mortgage and credit markets in the United States, drawing on the extensive research and data contained in his new book, The Rise and Fall of the U.S. Mortgage and Credit Markets. These included issues that are commonly cited, such as lax monetary policy, the ability of lenders to pass along risk and the failure of rating agencies, but also some factors that are often overlooked, such as the procyclicality of regulation (the tendency for regulation to be loose during good times but much more stringent in financial downturns). Barth pointed out that regulation of the financial system is overly complicated, causing inadequate enforcement and a lack of accountability.
When comparing the economic situation in the United States to the situation in other developed countries, Eichengreen forecast that many European and Asian countries are likely to have more severe and lengthier recessions. Although investors around the world bought up securitized U.S. mortgages, he doesn't believe the American financial system was entirely to blame for the world's financial crisis. Poor financial decisions were made at various financial and government institutions in Europe; panelists noted excesses in the financial industry in Iceland and Germany. "How could the Icelanders allow their banking and financial system to grow to eleven times their economy?" asked Eichengreen.
Alan Boyce of Absalon proposed that an alternate system of mortgage lending, similar to the one in Denmark, would reduce the number of foreclosures in times of declining real estate prices. The system would distribute risk among the loan originator and the ultimate owner of the mortgage while giving upside potential and downside protection to homeowners; it would structure mortgage-backed securities in the same transparent manner that has long been used successfully for corporate bonds. He noted that Denmark had a substantial run-up in home prices, but is weathering the aftermath of the bubble without the turmoil experienced elsewhere. Boyce is currently working to encourage the implementation of the system in the United States.
When asked to predict when the housing market will bottom, the panel of experts suggested that until economic growth resumes, real estate prices are likely to continue to decline. Although only 10 to 15 percent of mortgages are currently in delinquency or foreclosure, the situation can become much more grave by the end of the year if we do not take bold action, warned Boyce.
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