Financial expert discusses causes of current economic crisis

October 15 2008

According to one financial expert, the current economic crisis is a \"complicated crime with a huge list of conspirators.\"

While no one entity is to blame for the financial turmoil affecting both U.S. and world markets, a lack of governmental oversight and supervision led to the crisis, said Edward J. Kane, the James F. Cleary Chair in Finance at the Carroll School of Management at Boston College. Kane presented his paper \"Ethical Failures in Regulating and Supervising the Pursuit of Safety-Net Subsidies\" to audience members during a recent presentation at the Indiana State University College of Business.

Kane focused his talk on how the current crisis came about, pointing to a failure on the part of regulators, supervisors, managers, and investors to perform due diligence.

\"Rules don\'t mean much if they\'re not enforced,\" Kane said.

The crisis can, at least in part, be traced back to the \"S&L mess\" of the 1980s, Kane said. The savings and loan crisis amounted to more than $100 billion, much of which was paid for by taxpayers and eventually led to budget deficits. The current situation marks a \"complicated continuation\" of those earlier economic events, Kane said.

\"That taxpayers are forced to pay the bill for this mess is a scandal of the highest order,\" Kane stated in his paper.

While many in the public have been questioning the recently approved federal bailout plan, many in the financial community are in support. Kane quoted playwright George Bernard Shaw to illustrate the dichotomy between those paying for the plan and those being bailed out by it.

\"If you\'re robbing Peter to pay Paul, you can count on the support of Paul.\'\" The quote was met with laughter from the audience.

Kane went on to assert that financial engineering has changed banking in the U.S. by utilizing extra deal making, leading to questionable loans. He compared questionable lending practices to alchemy, saying that lenders too often claimed to be able to turn risky mortgage loans in risk-free loans.

Another facet of the financial crisis stems from actual losses that have occurred. As financial institutions looks to shift those burdens to taxpayers, the public is left in a state of concern.

\"The crisis reflects uncertainty about the size of the losses and who will bear them,\" Kane said.

That uncertainty remains a top concern for many Americans and will take some time, as well as some changes, to turn around.

\"To fix things properly, authorities must face and answer one question correctly: Why and how did securitization become incentive-incompatible\'\" Kane said.

Kane\'s presentation was sponsored by Networks Financial Institute at ISU. Founded in 2003 with a grant from Lilly Endowment Inc., the non-profit organization strives to facilitate a more effective national and international financial services marketplace through student programs, financial literacy and though leadership. Networks Financial Institute is headquartered in Indianapolis with offices on the ISU campus and outreach in Washington D.C. and internationally.

For more information and a list of upcoming events, visit www.networksfinancialinstitute.org.

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Photo: Edward J. Kane, the James F. Cleary Chair in Finance at the Carroll School of Management at Boston College, outlines events that led up to the current economic crisis during a presentation at the ISU College of Business on Tuesday, Oct. 14. (ISU photo/Tony Campbell)

Writer: Emily Taylor, assistant director of media relations, Indiana State University, 812-237-3790 or etaylor16@indstate.edu

 

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Edward J. Kane, the James F. Cleary Chair in Finance at the Carroll School of Management at Boston College, presented his paper

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