During January I will offer a course on the ongoing global financial crisis. Currently I am assembling readings and designing the detailed flow of the course. My initial thoughts on how to organize it follow. Suggestions welcome.
This course examines the ongoing global financial crisis. We will explore five interrelated and complex questions:
1) What are the origins of the crisis?
We will examine what private parties, government bodies, transactions and laws or policies are involved in the unfolding global financial turmoil. We will learn, for example: what are Nina loans? Government service entities (GSE’s)? Collateralized debt obligations (CDO’s)? Credit default swaps (CDS’s)? We will learn about the U.S. regulation of banks and other financial institutions, mortgage lending, mortgage securitization, and derivatives. We will learn details about the pre-crisis history of key individual and institutional actors (who is Henry Paulson? Ben Bernake? What do investment banks do, anyway?). We will examine what effects, if any, sub-prime lending and the “housing bubble” had in the local Spokane economy. This “descriptive” portion of the course will enable us to talk intelligently about other aspects of the crisis.
2) Who deserves blame for the crisis?
This is an analytical dimension of the first question concerning the origins of the crisis. We will ask, given our understanding of the underlying transactions and events: whose acts or omissions caused this crisis? Some political rhetoric has lambasted “greed and corruption on Wall Street.” Is that a sufficient explanation? Who, exactly, was greedy and corrupt and acting in a way that triggered a global financial meltdown? What did they do, exactly? Besides some financiers or investment bankers, might anyone else have culpability? Lenders? Regulators? Investors? Consumers? Should people on “Main Street” shoulder no blame? Who benefited from the conditions leading up to the crisis? Trying to assign and apportion blame will help us address a subsequent question: what shall be done?
3) What bad things are happening in relation to this crisis, and what measures have been taken to address those harms and halt the crisis?
We will become familiar with specific effects of the crisis and specific measures that have already been taken in response to it.
To understand the harms from the current crisis, we will examine the practical consequences of the ongoing retrenchment of mortgage lending, resulting “negative feedback loop” with respect to housing prices, tightening or freezing of non-consumer credit markets such as inter-bank lending and commercial paper, the demise of many large financial institutions, the wiping out of trillions of dollars in stock market value, and the potentially deep global economic contraction that will affect the well-being of much of humanity.
We will also consider whether this crisis may be a watershed event in term of American economic models and our international “soft” power and prestige, looking at the likely economic, political, regulatory and cultural repercussions of the crisis.
Having better understood these harms, we will examine measures that have been taken as the crisis has unfolded. We will learn, for example, about JPMorgan Chase’s acquisition of Bear Sterns; the US government take-overs of Fannie Mae, Freddie Mac and, effectively, AIG; the US Congress’ approval of a $700,000,000,000 rescue plan; the SEC’s ban on the short-selling certain securities; and the joint action of a number of central banks in different countries to lower interest rates. We will go beyond a cursory headline identification of these events. We will examine in detail the debates leading up to passage of the bill authorizing the US Treasury to spend $700 billion on “distressed assets.” We will examine other US government responses.
We will study the knock-on affects as this “contagion” has spread around the world, identifying and evaluating what government authorities and private actors outside the US have suffered and done in response.
4) What ought to be done going forward?
What legal and policy responses are in order to avoid a similar crisis in the future? Many are calling for an overhaul of financial regulation. It has been widely claimed that de-regulation of the financial sector created or contributed to this crisis. Conversely, others suggest that government policies that distort markets are actually root causes of the crisis. Some insist mechanisms for greater global cooperation, not just changes in national laws, are needed to avert similar problems in the future in our globalized economy. We will grapple with these issues and examine the emerging debates.
5) What, if anything, can we learn from historic and contemporary parallels?
This is not the world’s first bubble, panic or global financial strain. Can we learn anything from the 1929 crash and the Great Depression that sheds light on this crisis? From the 1987 crash? From the bursting in 2000-2002 of the “dot com” bubble? From the bankruptcies of Enron and WorldCom? What about Japan’s post-bubble recession? The Swiss housing crisis? How are these and even earlier bubbles, panics, scams or meltdowns similar to or different from the current financial turmoil? Are massive disruptions inevitable? If they are, why don’t citizens and political or business leaders see them coming in time to prevent them?
Whitworth University where I now teach has a special term in January in which students take a single class, completing over three intensive weeks courses that normally would be spread out over a whole 14-week semester. Currently I am serving as chair of our Department of Economics and Business, and it just seems critical that our business school address this.
