Donkeys, Elephants, Bulls and Bears

Faculty Panel Discusses Causes and Consequences of Current Financial Crisis

Oct. 14, 2008

Molly Tarantino, Public Affairs

WELLESLEY, Mass. —The history of America’s financial markets contains many episodes of ‘boom’ periods followed by collapses and periods of financial panic — including the panic of 1907 and the onset of the Great Depression. As these crises spurred the creation of the Federal Reserve System and the Securities and Exchange Commission, current events are now forcing policymakers to begin to reconfigure our systems for regulating financial institutions, says Eric Hilt, assistant professor of economics at Wellesley College.

“Although recent innovations in financial markets have made the current crisis more complex than its predecessors, the underlying dynamic is fundamentally the same,” Hilt said. “And like those earlier crises, the ‘panic of 2008’ will likely result in dramatic regulatory changes.”

As more and more people feel the effects of the current financial crisis and credit crunch, many questions arise. How did this happen, and what comes next?

Hilt, an economic historian, will talk about the historical parallels to the current crisis during the panel discussion “Donkeys, Elephants, Bulls and Bears!” Wednesday, Oct. 22, at 12:30 pm in Pendleton Atrium on the Wellesley campus. Economics faculty members Olga Shurchkov, Malhar Nabar, Joseph Joyce and Akila Weerapana will join him to address the consequences and causes of the financial crisis. The event is free and open to the public.

Shurchkov will discuss the origins of the current global crisis, caused in part by excess capital from around the world, which has flowed into U.S. mortgage markets and mortgage-backed securities. Not all mortgages are created equal, and subprime mortgages have a higher default probability, especially when the underlying asset values drop, she said.

“The holders of these securities happen to be pension funds, money market funds and banks in the U.S. and abroad, which is why the crisis is global in nature,” she said. “The panic that ensued following the first round of bank failures and bailouts has added to the depth of the crisis, shutting down the lending channels and worsening the liquidity crunch.”

Nabar said the panel hopes to focus on the underlying causes of the financial panic, the measures taken by the Fed and the Treasury to deal with the crisis, and the likely fallout of these events on the economy.

“The U.S. financial system is arguably in its worst crisis since the 1930s,” Nabar said. “The subject has become one of the most important issues in the election, and we hope to facilitate discussion on the alternative policies that have been put forward to get the credit markets working again.” For more information, call x2154.

Since 1875, Wellesley College has been a leader in providing an excellent liberal arts education for women who will make a difference in the world. Its 500-acre campus near Boston is home to 2,300 undergraduate students from all 50 states and 68 countries.