Financial expert: People must decide what kind of economy will help country move forward

October 15, 2010

Americans must determine the kind of economy they want to improve the country, prominent financial expert R. Christopher Whalen told a crowd at Indiana State University Wednesday.

Whalen, who described the current economic conditions as similar to those in the 1920s, said that people need to start having more discussion on economic issues. He spoke to an audience of more than 70 people that included students and members of the business community. His appearance in Terre Haute was sponsored by Networks Financial Institute (NFI) at ISU, an outreach of the university's Scott College of Business.

Whalen spoke about a variety of conditions impacting the economy, from the history of American economics to free trade and banking. The financial expert told the audience that he believes that the United States is at a crossroads.

"We have to think about just what sort of economy do we want to have, and what sort of economy is it possible for us to have both in the near-term and in the longer-term basis," Whalen said, "and I think as we go through the banking crisis, which is not over ... we're going to hopefully start coming to a consensus on this, because I don't think we're there yet."

During his speech, he ran through a history of the 1920s, during which some sectors of the economy suffered. During that time, technology and innovation such as electrifying factories flourished, and productivity increased.

"So by the time we're in the midst of the 20s, we had an abundance of goods, and we didn't have enough demand," Whalen said. "Does that sound familiar? It kind of reminds me of where we are today."

From the mid-1960s and into the 1970s, the U.S. started to spend a lot of money domestically, which included housing, Whalen said. The country helped American soldiers be able to buy houses, but the efforts to have housing "as a driver of national growth and employment carried on right up to today," Whalen told the audience.

He also said that borrowing money and spending time building real estate "is not, in my mind, a valid way to preserve and grow, or at least stabilize, national wealth."

Banks are currently having trouble because more than 50 percent of the assets on their balance sheet have to do with housing, Whalen said during his speech.

"That is not a normal state of affairs," he added.

In referencing the current foreclosure crisis, he brought up his house as an example. His mortgage was originated by Bank of New York, which was then sold to Lehman Brothers before it was assigned elsewhere, he said.

"The trouble is, when I went down to the courthouse in White Plains, it still says ‘Bank of New York' six years later," Whalen said. "Nobody ever changed the recordation on the lien."

By overemphasizing housing as the most recent instrument of growth in the U.S. economy, banks and cities have been put at risk, Whalen said. He later said that banks may have to ultimately rethink their business model in the future.

His speech lasted about 20 minutes, after which he had a panel discussion with ISU economics professor Robert Guell and John Perry, who is senior vice president and trust officer for Terre Haute Savings Bank.

Guell said during the presentation that the challenge of the past several years with securitized mortgages is similar to the challenge of the late 1920s to early 1930s with regard to options and margin buying, when the overconfidence people had in those financial instruments in the 1920s was shaken with the stock market crash of that era. Similarly, in this decade we became overconfident in the securitization of mortgage loans, with that confidence subsequently shaken by the more recent financial crisis, Guell said.

He predicts that just as new regulations and a more firm understanding of the risks of options was developed in the intervening years, mortgage backed securities would also eventually benefit from clearer regulation and a greater understanding.

Photo: http://isuphoto.smugmug.com/photos/1047669534_YAJde-L.jpg (ISU/Tony Campbell)
R. Christopher Whalen talked about economic conditions affecting the nation during his speech at ISU on Wednesday.

Contact: John Tatom, director of research, Networks Financial Institute, 317-536-0281, ext. 712, or john.tatom@isunetworks.org

Writer: Austin Arceo, assistant director of media relations, Office of Communications and Marketing, Indiana State University, 812-237-3790 or austin.arceo-negrich@indstate.edu