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Professor Campbell Harvey responds to student inquiries about the current global financial crisis
September 19, 2008
1. I'm curious why the US Treasury Dept. decided to step in with Bear Stearns and AIG, but not with Lehman Brothers. Could you talk about the implications of each, and what the benefits and pitfalls of the government's decisions are? What are the potential pitfalls of stepping in at all versus stepping in selectively?
2. My question is, why is the Fed Funds rate so low and why do people seem to want it to go lower? I understand the theoretical concept that the low rate should encourage people to borrow money; however, isn't part of our current problem related to people not having enough money/incentive to "lend?" I thought over-borrowing (at low rates) was a major part of the underlying problem.
3. Can you compare the impact of this crisis between the United States and the developing economies of Asia in terms of intensity and length of the impact?
4. Why are Goldman Sachs and Morgan Stanley taking massive hits in the market? Both banks beat analyst earnings expectations, both have strong capital and liquidity positions, and both completely wrote off their sub-prime exposure months ago.
5. There have been many people saying that up to 1,000 banks may fail in the wake of this crisis as a result of the tremendous leverage in the system. How accurate are those quotes and what exactly has to happen in order to "take down the leverage?"
6. On a macroeconomic level, it appears that we can either hyper-inflate our way out of this mess or go through a massive deflationary credit cycle similar to the Great Depression. Which is most likely?
7. What do you think the ramifications of acquiring so many firms in such a short time-span (4 years) will be 2 or 3 years out for commercial banks that now have brokerage operations like Bank of America?
8. Explain why commercial banks are in trouble. They have deposits that are safe and guaranteed by the government.
9. Why was Bear Sterns the first bank to go down? And then Lehman, and now AIG? How does one bank going down influence the other banks?
10. Do "average" Americans who keep their money in commercial banks have to worry about their bank deposits being safe?
11. Why are markets declining in Asia/Europe, etc.? Is it due to investor fear, or are they facing monetary declines as a result of the US crisis?
12. For those with capital to invest, is this a good time to buy housing or stocks? (This of course depends on the company, but in general is there a greater number of companies than usual whose valuation has come down purely due to the crisis and not due to the operations/assets of the company declining?)
13. Personal political inclinations aside, do you think that one of the major economic proposals in response to the crisis made by the Democrats or Republicans will make more of a positive impact? Or is it unclear which proposal is "better."