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Financial Forum: Advice Leans on Prophetic Wisdom

Timely advice given by a panel of BYU-Hawaii professors echoes the warnings of President Gordon B. Hinckley, given a decade ago, almost to the day. These professors were the panelists at the School of Business Financial Crisis Forum and they encouraged students to stay away from debt and prepare for upcoming troubles. Such a pressing issue has the attention of many; the turnout for the forum was so large the event had to be moved from Aloha Center rooms 155 and 156 into the ballroom, and even then the over 300 attendees filled more than half the room.

The panelists were Erin Frederick, recent addition to the SCOB Finance Department, Giulia Faggio, of the Economics Department, and Troy Smith of the Political Science Department. The three gathered to answer questions and “discuss the nation’s most momentous financial scare since the Great Depression,” according to a flyer for the event. It was brought up by the panelists, however, that this is not just a U.S. financial crisis, but a global one.

These financial troubles of today were long foretold by the LDS prophets. The Church has always taught against incurring large amounts of debt. The timeless counsel of Elder Marvin J. Ashton in a pamphlet entitled One for the Money is to avoid debt. He said, “God help us to realize that money management is an important ingredient in proper personal welfare. Learning to live within our means should be a continuing process. We need to work constantly toward keeping ourselves free of financial difficulties. It is a happy day financially when time and interest are working for you and not against you.”

During the October General Priesthood Session in 1998, President Gordon B. Hinckley warned against debt and of the unstable future. After quoting Joseph’s interpretation of Pharaoh’s dream from the Book of Genesis, he gave a warning: “So many of our people are living on the very edge of their incomes. In fact, some are living on borrowings. We have witnessed in recent weeks wide and fearsome swings in the markets of the world. The economy is a fragile thing. A stumble in the economy in Jakarta or Moscow can immediately affect the entire world. It can eventually reach down to each of us as individuals. There is a portent of stormy weather ahead to which we had better give heed.”

Beth Haynes, the forum’s moderator and current chair of the Economics department, gave a brief overview of the economic situation behind the crisis and presented some general numbers for consideration: The U.S. gross domestic product (GDP) is about $14 trillion, and the world GDP is about $60 trillion. The total value of derivatives (financial instruments that transfer investment risk between entities) in the world is over $600 trillion and in the U.S., as of the first quarter of 2008, was about 180 trillion.

After sharing this information, she posed three general questions to the panelists and then those in attendance were given time to ask questions. Provided here will be a highlight of the answers given by the panelists.

How did we get into this situation?

    • Professor Smith: Markets require rules and umpires. The government is supposed to act as this umpire and set rules and legislation. Wall street acted as it was supposed to, and so we have to figure out who is responsible. Is it the government, because of failed regulation or unforeseen problems?Businesses try to use the government to their advantage through special favors, and the government is tempted to get benefits from these businesses. When this happens, the government doesn’t act as an umpire, especially when it is needed to intervene in the market.
    • Professor Faggio [at right]: Eventually the housing market started to decline. Many banks had issued debt using the mortgages of sub-prime borrowers as collateral, called securities. In 2005 these securities, based on mortgages, started to lose value. No one knew how many bad loans each institution carried, and the institutions themselves were unable to assess value on these loans. As we found out that these institutions had bad loans, we found ourselves in a liquidity crisis and the banks and other institutions started to close. Then it became a confidence crisis.

 

  • Professor Frederick: From 2006 to 2007, there were $1.8 trillion in mortgage backed securities. It was the sub-prime market that lit the match to the fuse… The sub-prime market was the first to default, and though those loans made up only ten percent of the market as a whole, there was a rapid change in interest rates, in what investors were willing to accept and what borrowers were forced to pay… Since it started out as a liquidity crisis, banks stop lending to each other. It was like an engine that started to seize up; banks were unwilling to let the system function the way it needs to.

What is going on now?

    • Professor Frederick [at right]: The current defaults are coming from investment banks, so commercial banks are continuing to survive. Firms with less capital are being acquired by firms that have capital. Warren Buffet is a great example; he had capital and is now able to buy assets for significantly reduced prices… Because of the liquidity crisis, people are asking the government to step in and help stabilize the housing market and free up the credit strain. But there is still the question as to whether or not that would help… If you are an owner in the housing market right now, it’s not a great time for you, but if you are looking to purchase, then now is a good time because housing is more affordable. This is the driving factor behind the proposed legislature.

 

    • Professor Faggio: There is still high volatility in the stock and credit markets, and it has turned into a global crisis. Institutions like Bear Stearns, Northern Rock (a British bank that was nationalized due to instability) and now Lehman Brothers, AIG, etc. There are three banks that are becoming bigger and bigger: Bank of America, Citibank and JPMorgan Chase. They are so large that there is a great diversification of activity. The Fed[eral Reserve Bank] is intervening with companies and it wants stricter rules. Is this the end of market capitalism in the U.S.?

 

  • Professor Smith: Secretary of the Treasury Henry Paulson has put together a three-page proposal that would give him an enormous amount of power to deal with this problem. Basically, the proposal says ‘I get to decide what to do and there are no appeals.’ Congress didn’t like it that much, so it failed. They changed it a little bit and the Senate passed it, but it failed in the House the other day.

What does it mean for us?

  • Professor Faggio: Access to credit will become more and more difficult and this will lead to a deep, prolonged recession. It means there will be no more car loans, no student loans, no credit cards, or they will all have high interest rates. For business, there will be no loans either. Most businesses pay their employees and other expenses at the beginning of the month off loans, and then pay back the loans with their revenue at the end of the month, so this is a bad situation for all these companies. Also, there will be no loans for research and development, which is the biggest product of U.S. companies.This crisis is mostly only affecting U.S. and European banks because they were the most exposed to these mortgage-backed securities. Emerging markets are immune to this situation. But, countries like China, which exports most of its goods to the U.S., will also be largely affected.
  • Professor Frederick: It is a great misnomer that the government is the only source to bind the toxic assets, which are tying up the balance sheets. There are people who are willing to buy up these assets, but not at the prices that some people want.Is it the role of the government to go out and buy up assets and then turn around and make a profit from them? No. Their job is to make the rules and enforce the rules, and now they are going to be investing side by side with others in the market. That’s not the way things should run in a free market.Some problems that are close to home: A fund called the Short Term Fund that manages the cash assets of a 1000 private schools and universities. They just today suspended redemption on assets in their funds, which means colleges and universities are going to have problems fulfilling their obligations. Also, corporations and municipalities are going to find difficulty in getting funding business. As a new employee going into the job market, this will make it hard to find jobs.
  • Professor Smith[at right]: The current financial crisis is simply the symptom of a wider problem. We live in the age of ideology; we defer less to reason and experience and more to ideologies to explain our problems. There are three major ideologies at play today: 1) The media is biased and controlled by larger groups-it is not an accurate source of information; 2) Democrats have the ideology that the government is always the solution. A bigger government will have more control; 3) Republicans believe the markets are the solution. The market will sort itself out and a smaller, less involved government is needed.There is a serious deficit of leadership in the U.S., and the current leaders don’t hold the right ideals. Public trust is very low among the institutions that are at the center of these problems, and they can’t lead without our trust.We need a government that is powerful, aggressive, responsible and limited.

Other questions were asked of the panelists, especially about advice for the future. Smith’s advice was to get involved in local politics and vote, so politicians will see that people do care about the nation. Frederick added, “When it comes to the impending recession, we should make it quick, deep and painful, learn from it and move on. We got into this mess because we like growth and a high GDP, so we like debt. We used our homes as if they were ATMs.” She then asked the audience, “Will we do the things that are good for us in order to recover, or do the easy thing and allow the government to try and solve the problem? What responsibility are we willing to accept?”

There was agreement among all three panelists that advice given by the prophets has always been wise advice. “Like President Hinckley said, we should avoid debt like the plague,” commented Faggio.

Other questions can be sent to the three panelists via email:

Erin Frederick : erin.frederick@byuh.edu

Troy Smith: troy.smith@byuh.edu

Giuilia Faggio: gfaggio@byuh.edu

-Photos by Aaron Knudsen