Two University of Arizona economics professors explained Wednesday to a packed auditorium that jobs hang in the balance and a hedge fund crisis may come next, as the U.S. Senate voted to inject as much as $700 billion into the credit markets.
UA finance professor Christopher Lamoureux told about 300 people at McClelland Hall the mortgage crisis may be followed by a collapse of hedge funds, giant, unregulated financial operations that bet on winners and losers to balance risk.
That’s why, he suggested, Treasury Secretary Henry Paulsen and Federal Reserve Board Chairman Ben Bernanke stalked the halls of Congress to warn of a potential steep drop in lending in the U.S. economy.
“It may be that the reason these guys were in Congress is because they knew the hedge funds, in coming days and weeks, may be in trouble,” Lamoureux said.
The prediction hushed the crowd and prompted UA economics professor Gerald Swanson to joke that he might have lost his title as the oracle of gloom and doom.
Swanson wouldn’t be outdone and held out a $20 bill, explaining it was only worth as much as people were willing to accept it as legal tender for goods and services.
He said the crisis in lending markets threatens to undo the one thing that holds the U.S. economy together: faith.
“Our financial system is based on confidence and nothing else,” Swanson said, adding later: “We have gotten into a vicious cycle. Someone has got to step into the breach and stop it.”
The discussion dealt with investment terms such as credit default swaps and the London Interbank Offered Rate, but the message was clear that the federal “bailout” or “economic rescue” is a necessary step.
Public opposition to government intervention on behalf of the wealthy bad actors has been fierce but misses the point, Swanson said.
“It’s like, ‘I don’t care if I go to hell, so long as my neighbor goes to hell with me,’ ” Swanson said.
Lamoureux brought up a 1998 incident when the investment fund Long Term Capital Management used $5 billion in hard cash to leverage $129 billion in wealth. Then the loans came due and the investment group almost went under.
The New York Federal Reserve Bank president brought banking creditors in for a meeting to relax their demands on Long Term Capital Management because if the fund went under, it could have taken down a lot of the banks with it, Lamoureux said.
In recent weeks, insurance giant AIG and Freddie Mac and Fannie Mae needed government help.
“It’s been a dizzying time,” Lamoureux said. “It’s a month that will go down in the history of finance.”
Eller College of Management Dean Paul Portnoy summed up the night, saying, “In times like these, we should remember there have always been times like these.”