US & World

UCLA business profs sound off on bailout plan

The country's financial crisis is the talk of university economics departments and business schools across Southern California. UCLA hastily arranged a panel of experts this week to talk about it. Hundreds of students packed an auditorium. KPCC's Frank Stoltze says the panelists, by and large, opposed the 700 billion federal bailout plan.

Frank Stoltze: For years, Ed Leamer's been issuing economic forecasts from UCLA's Anderson School of Management. He is a well-respected economist who doesn't mince words.

Ed Leamer: So I pose a question to begin this. If you're going trick-or-treating this year, what's the scariest outfit that you can wear? (laughing)

Stoltze: Leamer said the answer is to dress up as Treasury Secretary Henry Paulson. Leamer accused Paulson of fear-mongering by overstating the consequences if Congress rejects the government's economic bailout plan.

Ed Leamer: Take a deep breath. Relax. We're not going to have a great depression. Whether the Congress passes this bill or not, we're going to get through this. We might have a more severe downturn because of the credit crunch.

Francis Longstaff: I think there's a lot of money willing to jump in. And we're kinda seeing that. Every time we have one of these downturns, things kind of pick up very quickly. There's a rebound the next day.

Stoltze: Francis Longstaff teaches finance at UCLA. He stood before a giant screen projecting one of his market charts. Longstaff thinks the market for mortgage-backed securities might be close to hitting bottom.

Longstaff: Lot of people are shell-shocked, have gone through this, bought a little bit too early. They've been stung four times, but now I think there's a lot of folks that will step up and start buying this stuff. It'll be very quickly liquid once it's evident that we have hit the bottom of the market.

Stoltze: Richard Roll says the government can address the credit crunch without buying up what some people call toxic mortgage-backed securities. The UCLA finance expert brings a lot of real world experience to his judgment. He founded the mortgage securities research group at Goldman Sachs in the 1980s. Roll says the federal government could buy bank shares. So could private money, and he explains why it doesn't.

Richard Roll: Very simple reason: the bondholders and the stockholders of those institutions for which that's feasible are waiting to see if there's a bailout package passed, because why should the bondholders take a hit and exchange their bonds for stocks if they can get the government to pay for the difference? So I think that, you know, the very fact that the government is considering something like a bailout already affects private actions that might have otherwise taken place.

Stoltze: A different perspective greets the matter from the 33rd floor of a downtown L.A. high rise. This is the office of Nelson Rising, CEO of Maguire Properties, one of the biggest property holders and developers in the region.

Nelson Rising: I think right now, so many of our institutions are threatened that we at least have a time out, and give the markets a chance to breathe. Let banks rebuild their capital, which the current plan would allow them to do.

Stoltze: Rising says it's not just about high-flying Wall Street investors.

Rising: Where it's really going to hurt is when companies can't borrow money for inventory for the shelves, students can't get loans because there are no college loans available. I see a tremendous potential for a downturn in the economy.

Stoltze: Economist Ed Leamer of UCLA argues the downturn's necessary to correct bad lending practices, and the irresponsible bundling of mortgage loans.

Leamer: We need more bankruptcy. We have a financial sector which is much larger than it needs to be.

Stoltze: The panel at UCLA didn't dismiss the need for some government action to help jump-start credit markets and protect people who are paying their mortgages. But the economists questioned why taxpayers should assume so much risk, risk the markets should take on. The questions are complicated, even for the graduate students in the audience.

Student: I'm going to go teach undergraduate finance in a few hours. What am I supposed to say about the Madigliani-Miller Theorem? Do we talk about the, at first the irrelevance of the debt equity split for financing...

Stoltze: The professors on the panel launched into a response that would be too long to explain here.