Can it really be true?
The stock market has seen its greatest ups and downs since the 1930s. The government has offered a massive bailout to the country's financial giants, but not before one Wall Street titan crumbled in the credit crunch. Even the experts' ideas for solving the crisis are all over the place.
"Certainly there will be increasing amounts of taxes that will need to be paid by the wealthy to finance the cost of shoring up the system," said Mark Wolfson, a consulting professor in accounting and finance at the Graduate School of Business. "I have no doubt that will occur no matter who is the next president."
Not so fast, says a close adviser for one of the men who may hold that title.
"That's backward," said John Taylor, a Stanford economics professor and member of Sen. John McCain's economic policy team. "Who would increase taxes at a time like this?"
So it went Friday during a nearly two-hour-long panel discussion in which five economic experts mixed market theory with gut speculation while taking stock of the world's financial crisis.
The forum, organized by the Stanford Institute for Economic Policy Research as part of Reunion Homecoming 2008, was moderated by SIEPR Director John Shoven.
Speaking just before President Bush's weekend meeting with world finance ministers, Wolfson predicted the stock market might be closed early this week to give Wall Street a chance to stabilize. Taylor said such a move was highly unlikely.
He was right. The Dow Jones industrial average shot up 936 points Monday, the market's biggest gain in more than 70 years. Fueling the Dow's surge was news that the government would invest up to $250 billion in the country's banks—the latest and boldest step taken by the Treasury Department during the current crisis.
A few of the panelists gave high marks to how Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson have been reacting, but criticized Paulson for allowing investment banker Lehman Brothers to collapse. That failure helped cause a surge in the rates that measure how much banks charge to lend to each other, which in turn led to the current credit freeze.
It also scared ordinary investors—a drawback some say was greater than Paulson's fear that a Lehman bailout would increase moral hazard by sending a message that the government would always provide a safety net for risky investors.
"When the house is burning down and the fire crew is there and the firefighters are hosing down the house putting the fire out, it's not the time to turn off the hose and give the homeowners a lecture about smoking in bed," said Business School Professor Darrell Duffie.
Despite Paulson's misstep with Lehman Brothers, Wolfson said the Treasury secretary should be given more power to act "unilaterally" in addressing the crisis. He said waiting for Congress to debate and act on any more proposals like the $700 billion rescue package passed two weeks ago could stall badly needed action.
"It's the one great hope of getting our system back on track," said Wolfson, who is also managing partner of Oak Hill Capital Management.
The other panelists also suggested pieces for an overall financial fix.
Taylor echoed several of McCain's proposals, including calls for a government spending freeze and new programs to grow the job market. Anne Casscells, managing director and co-president at Aetos Capital, said Americans need to save more and avoid refinancing their mortgages to pay for vacations, college tuitions and medical emergencies.
Duffie said risk managers at financial institutions need to have a greater say to help put the brakes on runaway profits. And Dennis Lockhart, president and chief executive officer of the Federal Reserve Bank of Atlanta, said those companies and the country's banks will likely restructure their business models if they learn any lessons from the financial meltdown.
But everyone seemed to agree on at least one thing: The mess will not be cleaned up soon.
"I would say we have some time more to go," Lockhart said.
