“Trust is dead,” said Margaret Forster, a Notre Dame associate professional specialist in finance. Forster was speaking as part of a panel convened at the Mendoza College Oct. 13 to analyze the credit crisis at a time when lending was paralyzed and detailed policy responses were still taking shape in Washington and abroad.
At the Finance Department-sponsored event, Forster urged steps to re-establish confidence in collateral so that frozen credit markets could be freed up. She suggested renegotiation of subprime mortgages and establishment of an auction system for the very complicated and hard-to-value securities that had sprung up around those mortgages. Such a system would “supply information about the underlying assets,” she said.
In the short term, Forster said, government intervention in the financial system “is inevitable” because “it’s the only party we trust—even though it’s very fragile.”
Government must share the blame for the crisis because regulators did not impose adequate risk controls as new financial instruments and practices for investing in them multiplied among various institutions, said Tom Cosimano, professor of finance and visiting scholar for the International Monetary Fund. “The government allowed a shadow banking system to develop,” but it must now ensure equivalent rules for capital requirements and monitoring to avoid future problems, he said.
While agreeing that an infusion of government spending was needed to stabilize markets, Nelson Mark, DeCrane Professor of International Economics, cautioned that borrowing another $700 billion would add to the mounting U.S. national debt.
For the time being, while macroeconomic trust is being restored, banker John Rosenthal (’81) urged restraint. Rosenthal, who is CEO of the Northern Indiana region of Old National Bancorp, recommended that company executives diversify their relationships with banks and added, “People should always be responsible and live within their means. But now, more than ever, consumers mustn’t rely on ever-increasing asset values to support out-spending their current income.”
Forster offered her own
diagnosis, saying a number of factors, caused by a number of participants, combined to create
the credit crisis. “We’re all in this mess,” she said. “We need to establish a system in which prices reflect fundamentals and not these fire sales.”