By VANESSA LANGDON
Contributing Writer
The economy is not the most exciting subject, but to college students everywhere understanding the situation and the causation of the recent recession directly impacts the scariest thing that i
s encountered, far worse than the scary costumes of last week student loans.
Last Wednesday, Saint Rose hosted the 14th Tully Lecture; the Tully lectures are a series of business related lectures started in 1989. This lecture featured one of Saint Rose’s prominent alumni, Marie Schofield. Schofield is an expert in all things economical holding positions numerous positions with Columbia Management over the past 23 years. There she currently is the chief economist and senior portfolio manager.
Schofield spoke regarding the issues that lead and the ultimate result of the tough years of recession experienced from economic downturn. In her speech, “Tough Exit from Easy Money,” Schofield began by explaining the issues regarding the Fed or the Federal Reserve.
According to Schofield what matters is “when does it end, and what will happen when it ends? How will markets react?” The result of the Fed, and their “extraordinary path” and “lofty goals” as Schofield characterized it, are what will truly mater to the markets in the future.
She went on to explain to a packed room of Saint Rose business majors, community members, and alumni alike that the Fed serves two purposes- to ensure a safe financial system and to stimulate economic growth.
The latter is what Schofield finds issue with, the first goal which was made in 2009 she marks as a success but the economic growth according to Schofield was all based on theories. This is an issue because it is all an experiment, based on the Japanese whom also tried this theory of stimulation; it did not work for them.
Schofield then went back in time, further than some may have expected her to go. She went back to discuss the beginning of the recession and economic downturn but instead of 2009 she mentions 2007. She notes that she had personal experience that denotes this as the beginning of the downturn, slowly starting but a slump none the less.
“I know this because of my purchase as a bond manager,” said Schofield. “It was a housing bubble and home prices started to fall and defaults started to pick up. And my market the fixed income market was ground zero.”
Schofield explains that it wasn’t an overnight change in economic climate but “a slow moving train wreck.” This slow moving effect led to the Fed not responding until it was almost too late.
The thought process and evolution of alarm on the part of the Fed was curiosity at first, then it became concern because it started to impact the shadow banking system, then the first half of 2008 resulted in alarm, and lastly at the end of 2008 they were horrified.
This issue was not addressed because the Fed was too busy looking at economic models; not getting their well needed reality check from the fact and crumbling numbers around them, “their economic models were saying that they were going to be okay.”
These effects that weren’t noticed were not the sole result of the big banks, which is the main misconception, according to Schofield. But instead it was a series of failures in the economic system.
The failures were- household debt extremes, belief that home prices would never fall, belief that the economic model could manage extreme leverage, belief in the accuracy of credit ratings, government regulators asleep at the wheel, and the powerful emotion of denial. This created a perfect storm- people were buying more than they could afford, the banks were giving out enormous mortgages, and companies going further in debt.
The scariest aspect of this downfall for Schofield was the moment that she was in a crowded room listening to a conference call between Columbia Management, the banks, and the Fed that she realized that the only thing that could save the economic system-the Fed themselves and they did not understand it one bit.
She mentioned specifically a memory of a coworker looking over at her and saying, “Marie we’re in deep [expletive],” and in that moment she knew it was going to be a much longer ordeal than was expected.
The issue was the housing bubble, but under that was the bigger credit bubble, which caused the recession. A recession that was worse than any in the past, normally the growth does dip but then springs back. With this recession there was no spring back.
The last time that there was such low spring back was the Great Depression. The growth has been about 2 percent, where we are right now is where we normally are at the beginning of a recession in the past. The government has tried to aid in this through taking on the debt from the populous but the main issue is time.
It just takes time for markets to bounce back. The main ways to reduce debt besides waiting it out for the market to swing back is austerity (cutting spending and paying debts), restructuring (defaulting), and debt monetization.
The average time that it takes for a market and economy to fully recover form a recession is 10 years. The U.S. is closing in on seven years, which makes Schofield optimistic for the future.
She is so optimistic that when asked during the closing question and answer of her lecture, she said that would advise the purchase of a home in this market, even noting that two of her children recently bought homes.
The biggest concern that Schofield sees as a consequence of this time period of nationwide economic hardships is the sad fact that student loan debt dollars surpassed credit card debt. This is an issue not only for college students but for the health of the economy.
This is delaying a milestone, which in turn is impeding recovery. There is less spending on such big events as weddings and less money spent on homes as people chose to rent.
Schofield characterizes the stimulus as a painkiller not a cure. She said the entirety of the fiscal policy needs to be changed, as a nation we’ve been spending more than we’ve been taking in since 2002. The issue is not resolving itself and the government is not doing its best at fixing it.
Schofield explains that the economy is not addicted to ZIRP or zero interest policy as well as QE or quantitative easing. Unfortunately even though stimulus occurred people are still scared, they may have more money but are choosing not to spend it for fear of a return to the dark days of a deep recession.
In closing Schofield quoted Yogi Berra saying, “In theory, theory and practice are the same but in practice they are very different.” Schofield believes in data, not in models and is positive about the fact that it was a long hard road but that it is getting better.
