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News Tip: Duke Professor Recommends Next Steps to Instill Confidence in Financial Sector

October 08, 2008

It is not surprising that global markets are reacting negatively to the $700 billion bailout plan because it “represents a drop in the bucket to the problems we face,” says a Duke University finance professor.

“The TARP program is too little too late,” says Campbell Harvey, who has been analyzing, teaching and consulting on global risk management for more than a decade. “We are seeing the dark side of globalization. When things get really bad, everyone -- including foreign banks -- goes down hard. There is no relief from global diversification.”

Harvey, the J. Paul Sticht Professor of International Business at Duke’s Fuqua School of Business, recommends several steps that the federal government should take to instill confidence in the financial sector.

“We need direct liquidity injections in the form of government minority stakes in our financial institutions. This equity investment would be unwound in five to seven years. The injection could happen very quickly and would jump-start the credit system.”

Other steps include protecting savings and checking deposits of all Americans; obtaining troubled assets at a price closer to fair value, not bailing out the financial institutions that are already insolvent by purchasing their assets at a premium price; recapitalizing the FDIC; and initiating a program that provides incentives to rework troubled mortgages.

“We need to minimize the damage to the real economy. We need to act quickly and decisively. This is also a crisis of confidence. So far, we are treating the symptoms -- not the causes. That’s bad policy.”

Harvey says this week’s commercial paper initiative “is a positive step for those companies that rely on this market to fund their operations. However, it does little for small- and medium-sized business who are not able to tap this market. Lest we not forget, small and medium companies are the drivers of growth and jobs in our economy. We need to avoid the mistake that Japan made in the 1990s and directly address the needs of these important firms.”

In response to the financial crisis, Harvey wrote a paper titled “The Financial Crisis of 2008: What needs to happen after TARP.”

“So far, policymakers have reacted to one crisis after another,” he says. “My proposals are proactive and are guided by lessons learned in previous financial crises, in particular the Swedish banking crisis.”