Wall Street and Main Street intersected in Room 127 of the Law School last Thursday evening as Yale professors discussed the causes of and solutions to the current financial crisis, as well as the impact of the crisis on the future of the U.S. economy.
The Law School Center for the Study of Corporate Law sponsored the panel — which included Law School Deputy Dean Jonathan Macey, finance and management studies professor William Goetzmann, and finance professors Gary Gorton and Andrew Metrick — on the evening before the House of Representatives passed a historic $850 billion financial bailout.
The panelists attempted to correct the popular misconception that subprime mortgages are causing what Gorton termed a “systemic crisis” in the economic system.
“If the problem was just that home prices went down and subprime borrowers defaulted, we would just have a social problem [caused by home foreclosures] — not a big crisis,” he said.
Gorton blamed the economic crisis on the lack of information about the way subprime mortgages were bundled as securities and bought and sold around the globe, which has led banks to be nervous about their liability.
‘The risk associated with these securities was transferred around the globe in a way alien to modern financial theory,” he said. “As a result, no one knows the risk, so banks are hoarding cash.”
The relationship between large financial institutions and the average citizen was a point of contention amongst the group, especially with regard to the economic bailout bill.
“Most people think, especially if you read the press, that there is a planet called Wall Street and another called Main Street, and somehow they are not linked,” said Gorton, a proponent of the economic bailout bill. “That simply is not true. What happens in one affects the other.”
Macey, who opposes the bailout bill, disagreed.
“When Main Street is foundering in a recession, no one says that the two are joined at the hip,” he said. “It is only when Wall Street is in trouble that people seem to say that. My issue with the bailout is that it is going to work from the top down — helping the larger institutions in hopes it will trickle down — not from the bottom up. It isn’t such a good idea from a moral hazard point of view.”
Several law students in attendance shared similar concerns about the bailout, also citing moral hazard, or a worry that bailing out the big banks will make companies more likely to take larger risks in the future.
“I believe that the bill is ignoring most Americans who are struggling do to this crisis,” said one student, who asked not to be named.
Metrick argued that those concerns are minor in the face of a total collapse of the financial system.
“This is not the bill I would have written,” he said. “But we need to restore confidence in — and to some extent repair the balance sheets of — these banks. This isn’t bailing out the bankers. They will still be in trouble. This bailout will help those of us who rely on credit to live.”
Goetzmann, who is opposed to the bill because he is concerned that it will not stop foreclosures, called attention to the impact home seizures have on society.
“The effects that [foreclosures] will have on quality of life, crime and other social issues will be seen really, really quickly — it won’t be five or 10 years down the road,” he said.
Alternatively, Goetzmann suggested that, instead of bailing out the larger companies, the government buy the troubled mortgages, which would in turn free up the credit markets.
Gorton, who previously supported a similar idea, said he no longer believes that is an option.
“Buying the mortgages is clearly a better solution, except there isn’t enough time anymore,” he said.
Looking toward the future, the panel was decidedly against reactionary regulation of the markets.
“We might have to accept that sometimes we will have a crisis and be forced to infuse the market with one or two trillion dollars in order to have a prosperous economy in the long run,” Metrick said.