Oct 292008
 
Authors: Kelli Pryor

Dr. Deepankar Basu, CSU assistant professor for the Economics Department, spoke to a room of about 30 people in the Fort Collins Main Library Wednesday, all in search of answers to the largest economic crisis since the 1920s.

Basu provided insight to the causes leading up to the recent economic recession, from the most recent to the long-term problems that started in the 1970s.

Most recently, Basu said, “faith in the financial system has been shattered.” Basu said that the failures of the major financial players — Bear Sterns, Fannie Mae and Freddie Mac and Lehman Brothers — were caused in part by the fact that they were unable to find financing from banks at crucial economic times.

Between Sept. 8 and Sept. 18 this year, those lending firms went bankrupt, were bought out by large banks or given loans by the federal government, Basu said.

“This financial crisis is not surprising if you look at the past 300 years,” Basu said, referring to many economic recessions that have happened globally.

Basu did not offer a time frame for the economy to get back on track, but he did provide a rescue plan.

In order to prevent a long recession, Basu said the American government must:

Recapitalize financial institutions or, in other words, increase the value of monetary assets.

Stabilize the housing market.

Increase wage income and

Increase regulation of finance by the government.

“In the short term we cannot do anything about this debt,” he said.

Banks have added to the short-term economic problems, Basu said.

“Every bank has an excess supply or an excess demand at the end of every day,” he said. “A bank that has a supply will lend to a bank that has a demand if they believe they will get back their money the next day. What happened was banks lost faith in each other and stopped lending.”

On top of the short-term problems, Basu explained that for the past seven to eight years, the housing market had begun to decline.

“Lowered interest rates created lowered mortgage rates,” Basu said. “This led mortgage borrowing to pick up and housing prices to rise.”

Many people began refinancing their mortgages but could not make their payments, which in turn caused them to default on their homes.

Basu credited people not being able to make their mortgage payments to the increase in economic debt.

“In the 1970s, labor productivity was growing faster than wages and has been that way since,” he said. “Debt now is 300 percent that of the national economy. This creates a very fragile economy.”

Basu’s seminar was the first of a four-part series addressing issues related to the recent economic crisis.

Staff writer Kelli Pryor can be reached at news@collegian.com.

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