What do you see as the causes of the current economic situation?
Chief Executive Office, University of Virginia Investment Management Co.
Important causes of the current global downturn include fallible people prone to emotional swings between greed and fear, U.S. policies that subsidize consumption and debt while taxing savings and investment, Asian policies that subsidize savings and investment and discourage consumption, and a failure of regulation to keep pace with financial innovation.
Dean, UVA School of Law
Excessive leverage caused by loose monetary policy for most of the past decade coupled with a severe decline in underwriting standards in the home mortgage market, all made worse by recent policy uncertainty.
Professor, UVA School of Lawn, teaches corporate finance and other courses related to law and business
There are at least three interrelated problems. First, we have suffered a large collapse in paper wealth. Second, we are experiencing a breakdown in our banking sector and financial markets, caused in large part by illiquid assets and leverage-induced insolvency. And third, we are caught in the worst global economic recession since the 1930s. Things are bad enough at home, but GDP numbers look far worse overseas.
Christine Gustafson (Col ‘82)
Senior Vice President of Investment at UBS Financial Services Inc.
The draconian deleveraging forced upon banks, corporations and individuals has led to the economic chaos we are now experiencing. This rapid shift in sentiment has led to a devastating “demand destruction” and a change in the mindset of most American consumers who believed that a home would always be the anchor asset of their net worth.
What is the most important factor in moving toward recovery?
In my opinion, fixing the banking problem must be front and center. This will unlock frozen capital, boost consumer confidence and help slow a decline in economic production.
Teresa Bryce (Col ‘81)
President, Radian Guaranty Inc., the principal mortgage insurance subsidiary of Radian Group Inc.
One critical factor is the stabilization of the housing market. That will encourage people who can afford to buy a house to purchase a home. Also, keeping borrowers in their homes through loan modifications and refinances will reduce foreclosures, which create large inventories of lender-owned real estate. As lenders cut prices even deeper to move the foreclosed properties, prices are further depressed and the vicious cycle continues.
Cleaning up bank balance sheets and avoiding bad policies like protectionism.
Dean, Darden School of Business
We must restore investor confidence—this is the precursor to restoring full employment and economic growth. The prime indicator of investor confidence would be the cessation of the liquidity crunch. Firms, households and governments simply need access to financing in order to fuel investment and consumption plans.
Will the current administration’s policy to address the situation be effective?
I think the new loan modification and refinance program that was announced in early March will be effective in stemming foreclosures and keeping more people in their homes. This program modifies mortgages to help bring the payment more in line with the borrower’s income and property value. Focusing on the debt-to-income ratio of the mortgage is a good step, but it will not address borrowers who are otherwise overextended and thus may be more likely to redefault.
The current administration’s policy will not be effective in the near term because it is short on substance and long on spending. The velocity of money will not be increased by the omnibus spending bill, and very little in this bill will have an immediate effect. We need tax cuts for small and mid-size businesses, and we need to know that once the drivers of GDP growth start to work again, they will not face undue taxation and regulation.
Yes. Winston Churchill is reported to have declared that “Americans will always do the right thing … after they’ve exhausted all the alternatives.” Our policies will evolve until we discover the right ones.
I am not impressed with the policy response so far—a “stimulus” with far too many pork-barrel giveaways, an attempt to use the economic crisis to short-circuit debate on hugely controversial items like health care reform and cap-and-trade, a proposed budget that would raise government debt to frightening levels, and a tendency to emphasize the symbolic—such as the AIG bonuses—rather than the consequential. The administration badly needs to show some discipline and focus.
What long-term changes do you see ahead in the economic landscape as a result of the current situation?
The change I fear the most is knee-jerk regulation, which is never forward looking and usually clamps down on the most law-abiding segments of the market. Regulators try to control what they know about—not what they should be investigating. We need to create a super-regulator that is staffed by the best and brightest minds to deal with the people who find a way to game the system.
There will be pressure on the global monetary system. The derivatives market will face regulatory upheaval. Asian economies will turn toward domestic consumption and diversify away from exports. American budgetary and inflationary pressures will increase. And fundamental economic theories, such as diversification and risk management, must be revisited.
After the painful restructuring we will have less debt, more saving, lower asset prices, higher prospective investment returns and more regulation.
This crisis will reshape whole industries, as did the major crises before it—in particular, watch media, automobiles, air travel and, of course, real estate. Protectionism seems to be on the rise, a trend that if unchecked would be a horrible mistake. We all have a massive amount of debt to repay, which will weigh down national economic growth. Households and firms will pay higher taxes for years to come. People will work longer and retire later. Government regulation of business will tighten with an increased emphasis on transparency of reporting, environmental sustainability, unionized labor and the provision of safety nets of all kinds—most prominently health insurance. But the engines of economic growth remain in place.
Special Report: The University and the Economy
This article appeared as part of a larger section on how the recent economic turmoil is affecting UVA and its alumni. Read more:
On the Front Lines
Alumni and faculty experts share their perspectives on how we got into this situation—and how to get out of it.
Time and Money
A timeline tracks how the University has weathered economic ups and downs throughout the years.
In the Classroom
As economic events unfolded, some professors threw away their syllabi and kept pace with breaking news.
Learn how some students are coping with the economy—with video.
Your Financial Health
Assess your personal finances with a quiz from McIntire professor Karin Bonding.
A Different World
A first-person perspective on how Circuit City’s collapse altered the career path of one alumnus.