On October 2, Columbia Business School held the third in a series of community forums devoted to the current status of the economy and financial markets. The participants in the forum included Dean Glenn Hubbard, the Russell L. Carson Professor of Finance and Economics; Bruce Greenwald, the Robert Heilbrunn Professor of Finance and Asset Management; Pierre Collin-Dufresne, the Carson Family Professor of Business; and Senior Vice Dean Christopher Mayer, the Paul Milstein Professor of Real Estate.
The event aimed to provide students and members of the School community with the chance to hear faculty members discuss the current economic crisis. The discussion took place in front of a capacity crowd in Uris 301 and was broadcast into several overflow rooms.
“We still are in a period of substantial credit stringency,” said Hubbard in his opening remarks, stressing the urgency of the situation. “Financial institutions remain undercapitalized for normal activity.”
Greenwald’s presentation underscored the importance of recapitalization, which he deemed essential to restoring credit availability. However, he argued that the two practices normally associated with promoting recapitalization — lowering interest rates and manipulating the money supply — are often ineffective. “The traditional means of recapitalizing [banks] have gone away,” Greenwald said, citing data that showed that during the 1990s monetary policy had no bearing on nominal GDP.
Greenwald came out in favor of the Treasury’s proposed bailout plan, saying, “If you don’t want to be Japan in the 1990s, just give [the banks] the money. The return in terms of economic stimulus will far outweigh the cost of any financing they get.”
Collin-Dufresne attributed the practice of subprime lending to an unusually high appetite for risk created by a decade of low interest rates and credit spreads. Because the recipients of subprime loans had never before been eligible for a mortgage, he said, there existed no models to accurately predict their default rates.
In the forum’s final presentation, Mayer contended that stabilizing the price of housing is necessary to resolving the current crisis. He discussed details of the plan he recently developed with Hubbard, outlined in a recent Wall Street Journal op-ed column, that would allow anyone with a primary residence mortgage to refinance at 5.25 percent on a 30-year fixed-rate loan. “As we look at the problem in the U.S.,” Mayer said, “we need to think about how to stop the housing crisis.”