During her four years as a financial services consultant, Lucy Matthews worked with some of the biggest names in the financial industry. Last year it was newly defunct Lehman Brothers. Before that it was recently nationalized Freddie Mac.
With current turmoil in the financial sector and increasingly uncertain job prospects, Matthews, who is taking night classes to complete a degree in historical studies, is watching closely as the economic drama unfolds.
"Right now it's just wait and see," she said. "I don't think that anything will happen (to my job) overnight, but you never know."
Economic uncertainty is plentiful these days, at UTD and elsewhere. At a forum organized by the economics department of the School of Economic, Political and Policy Sciences (EPPS), a standing-room only crowd flooded UTD's TI Auditorium to hear a panel of five UTD professors field questions about the current economic situation. Jim Murdoch, director of EPPS moderated the hour-long event.
The forum took part in the midst of a partisan impasse in Washington about federal U.S. policy.
The day previous, the House of Representatives rejected a $700 billion plan proposed by Treasury Secretary Henry Paulson, chairman of the Federal Reserve Board Ben Bernanke and U.S. President George W. Bush to rescue ailing financial institutions and loosen credit markets.
"Our entire economy is in danger," Bush said in speech supporting the measure. "Without immediate action by Congress, America could slip into a financial panic and a distressing scenario would unfold."
Economic woes, which began with an increase in home foreclosures last year, have come to a head in recent months. September saw a flurry of bad news beginning with nationalization of
mortgage giants Fannie Mae and Freddie Mac, followed the unexpected collapse of Lehman Brothers Holdings and Merrill Lynch. Their failure precipitated with the wholesale restructuring of the investment banking industry, according to press releases issued by the Federal Reserve.
The sale of Washington Mutual followed, the largest ever bank failure in U.S. history, on Sept 25, according to an FDIC press release. The month ended with the largest ever one-day drop in stock market history, when the Dow Jones Industrial Average fell 777.68 points.
"This crisis is often referred to is a meltdown," said Nathan Berg, associate professor of economics. "One thing I hope we can all get is that this is not the market heating up. This is a market deep freeze."
The seeds of the crisis were sown in the early '90's, when the federal government sought to promote minority home ownership by relaxing the standards by which Fannie Mae and Freddie Mac guaranteed mortgages, said Ted Day, professor of finance and managerial economics.
"We had twenty-five years of flat home ownership and then all of a sudden in 1995, it starts going up," Liebowitz said. "And goes up a big percentage, straight line, no ups and downs, just straight up. So they were being very successful."
As demand increased, so did home prices. Riskier borrowers, who in a weaker housing market would have defaulted on mortgage payments, simply sold or refinanced their homes, which were already worth more than their purchase price, Day said.
The housing bubble that resulted allowed lenders to pursue riskier loans without suffering any negative consequences. So long as housing prices increased, everything was fine. But in 2006, home values stopped rising, borrowers began to default, and, in March 2007, the sub-prime mortgage crisis began in earnest, he said.
Increased defaults in the mortgage market soon infected other sectors of the economy through complex financial markets. In order to free up capital to make more loans, lenders sell their mortgages to investors. Decreased regulations in the '90's allowed mortgages to be broken into small pieces, repackaged with other assets, and sold as securities, Liebowitz said.
In many instances, these securities - even those backed by risky sub-prime loans - were classified as safe by one of the three agencies whose ratings of securities are recognized by the federal government. As a result, they were purchased by more conservative investors such as pension funds, and spread throughout the broader economy, Liebowitz said.
"The rating agencies were ignoring the previous three decades in the housing markets," he said. "What they should have done is said: 'well, we can't rate it because we don't know.'"
Although poor mortgage lending practices sparked the crisis, economists disagree on the extent this was responsible for the problems in the broader economy.
Of the nearly 50 million mortgages held in the U.S., typically about 1% default. Currently, the default rate is around 3%, Berg said.
"I'm not really sure that this is the location of the problem rather than the intensely leveraged secondary financial markets," he said. "If we just take the regulators off of vacation and put them back to work, there's a lot to be optimistic about."
One point of concern is the liquidity of credit markets, which determines how willing banks are to make loans. This could potentially impact the student loan market said Chetan Dave, assistant professor of economics. Without greater incentives, students may eventually find it more difficult to find a lender.
"If banks don't have the incentive to start giving out the money that they have to deal with for loans, than
Economists disagree on the severity of the economic crisis. While Bernanke, Paulson and Bush have stressed the need for immediate intervention, Day thinks the situation is overblown.
"The money didn't just go away," he said. "I think the flow of capital is better now than it's ever been. There's investment capital out there that I think will be forthcoming to solve problems."
Leann Gilliand, a graduate student in accounting, said she sees potential in the midst of crisis.
"I think that there's a great need for individuals in my field, especially so they hopefully can prevent this from happening in the future," she said.
Day said that regardless of the economic situation, UTD students should focus on their own financial responsibility.
"Don't use credit card debt," he said. "Don't think like a corporation. Think with a mind to sleeping well at night and managing the financial well-being of your family."
Liebowitz agrees. Most people are in no immediate danger.
"Right now, if you didn't have all the headlines going on, you wouldn't have any evidence to say that we're heading towards the end of the world," he said. "But that doesn't mean we're not."
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