Harvard Professors Address Finance Fears

Financial experts discussed issues ranging from the causes of the current economic crisis to its potential ramifications at a panel moderated by Business School Dean Jay O. Light yesterday.

Nicholas P. Retsinas, a lecturer of business administration at the Business School and a former director of Freddie Mac, traced the roots of the turmoil in the mortgage markets to the New Deal.

“Many of the housing rules currently in place came from the New Deal,” he said. “At the time, officials were trying to figure out how best to make credit and liquidity available to the average American homebuyer.”

Retsinas said that structural changes in the mortgage market during the 1990’s, along with low interest rates and a rise in immigration to the United States, led to overheating in the U.S. housing market, which ultimately resulted in the current financial crisis.

The panelists addressed questions from the audience about how this credit crunch would affect the global financial system.

“We will certainly see a fundamental shift,” said David A. Moss, a professor of business administration at the Business School. “The implications of the bailout are much larger than dollar value.”

The real question is what American taxpayers want the government to do, he added.

“By allowing this bailout to go forward, we are putting greater weight on financial stability than financial innovation, and the government will have more responsibility for the financial system,” he said.

Clayton S. Rose, a senior lecturer of business administration at the Business School and the former head of the Global Investment Banking and the Global Equities Divisions at J.P. Morgan, called the regulatory changes at Goldman Sachs and Morgan Stanley “significant.”

“The reclassification of Goldman Sachs and Morgan Stanley was not a voluntary exercise,” he said.

The Fed and the Treasury forced the changes on both firms as a consequence of providing them with assistance, he said, adding that regulations on the banks will be stronger and the capital requirements will increase significantly. “We will see the firms’ cultures change, and their returns will go down as a result,” he said.

One student asked the panel which industries would benefit from, or at least not be harmed by, the financial crisis.

“Besides the market for HBS professors?” quipped Dean Light, who is also director of the Harvard Management Company.

“Private equity firms and hedge funds will be able to pick up many of the opportunities that the more highly regulated banks will be unable to participate in,” he said.

—Staff writer Prateek Kumar can be reached at kumar@fas.harvard.edu.