WSU professor foresees more economic woes

Financiers hungry for risk a year ago have slammed the vaults shut, precipitating the credit crisis that claimed one of the nation’s most venerable investment banks over the weekend.

Washington State University professor John Nofsinger said Tuesday that Bear Stearns will not be the last casualty.

“There’s never just one cockroach,” he said.

Nofsinger, the author or co-author of several textbooks on investment psychology and corporate governance, said banks and hedge funds have pumped billions of dollars into credit markets over the last decade, to the delight of consumers who loaded up on homes, cars and credit card debt. With the takeover of Bear Stearns by JPMorgan Chase & Co., and the collapse of several hedge funds, the credit party is over, he said.

“They don’t want to take risk, at all,” Nofsinger said.

He said the over-leveraging of assets the markets are now grappling with was a decade in the making, and will not be cured overnight. The Federal Reserve Bank’s challenge, he said, is to contain the damage to the financial sector, and give the markets time to restore order.

“It’s just amazing how volatile the markets have become,” Nofsinger said after the close of markets Tuesday, and the Fed decision to lower interest rates another three-quarters of a percent.

Tuesday’s 420.41-point jump in the Dow Jones industrial average mirrors a 416.66-point increase last Tuesday, he noted, but the Dow finished last week up just 57 points.

Nofsinger said Fed actions to restore confidence have been shadowed by bad news somewhere in the economy. Tuesday, it was the lowest number of new housing permits in 16 years, and a pickup in inflation at the wholesale level.

Also Tuesday, J.D. Power and Associates estimated new car sales in 2008 would be the lowest since 1994.

Nofsinger said consumption across the board could dry up if consumers cannot get credit.

At the University of Idaho, professor Terry Grieb said markets are paralyzed because no one knows what securities backed by mortgages and other assets are worth. Fed rate cuts should revitalize those markets, he said, adding that the cuts will continue until the liquidity crisis passes even if the dollar continues to weaken against other currencies.

The cuts, coupled with the economic stimulus package approved by Congress last month, should begin to revitalize the economy late this year or in early 2009, he said.

Grieb said the volatility has been a bonus for the university’s Barker Capital Management and Trading Program, which allows students to deploy a $1 million endowment using their own trading strategies. While declining to give specific results, he said “We are protecting the endowment very nicely.”

Grant Forsyth, economics professor at Eastern Washington University, said the liquidity crisis is a classic “lemons problem”: Nobody can sniff out the lemons among the billions of derivative securities, so no one buys anything.

“The banks themselves seem to have lost the ability to judge their own assets,” Forsyth said.

Although the Fed may be bailing out bankers and investors who have only themselves to blame for their losses, he said, the alternative was to stand by as other banks and financial institutions were engulfed by the credit crunch.

Forsyth added that the central bank cannot correct the problem alone. Regulators were not doing their job, he said, and the ratings agencies were too lax in evaluating loan collateral.

“Things were rated investment grade, and clearly they were not,” Forsyth said.

Nofsinger said Americans may end up in a personal credit environment akin to that of the 1950s, when they bought a home with down payments as much as 50 percent of the price, and paid cash for automobiles.

“It’s incredible how we’ve gone from a society that had no debt to one that’s leveraged to the eyeballs,” he said.