Economic Stabilization Agency

Transcription

[ BACKGROUND NOISE ] >> GOOD AFTERNOON. MY NAME IS DAVE DOWELL, I'M VICE-PROVOST HERE AT CSULB, AND I'LL BE MODERATING THE PANEL TODAY. BEFORE WE GET STARTED I WANT TO EXTEND SOME THANK YOUS, JEET JOSHEE AND HIS STAFF FROM UCES PLAYED A BIG ROLE IN ORGANIZING THIS AND DEANNA BENNET AND LINDA FONTES FROM THE PROVOST OFFICE -- [APPLAUSE] [INAUDIBLE] -- DEANNA AND LINDA, WHERE ARE THEY? ANYWAY THEY'RE, I GUESS, THEY'RE NOT IN THE ROOM BUT THEY PLAYED A BIG ROLE IN THIS AS WELL. I WANT TO LET YOU KNOW THAT THIS IS GOING TO BE BROADCAST ON CSULB CABLE, BEACH TV, CHANNEL 18 CHARTER, CHANNEL 28 IN SIGNAL HILL AND WHEN ARE THOSE BROADCASTS, DO YOU KNOW? >> I BELIEVE THEY SAID ON FRIDAY EVENING -- >> FRIDAY. >> -- RUNNING THROUGH THE WEEKEND, VARIOUS TIMES. >> OKAY. >> 6:10 P.M. >> AND ONE OTHER QUICK ANNOUNCEMENT FOR THOSE OF YOU WHO ARE TRULY ECONOMICS JUNKIES, THERE IS GOING TO BE ANOTHER FILM ON THE GLOBAL FINANCIAL CRISIS IN THE BEACH AUDITORIUM ON MONDAY OCTOBER 27TH, THIS IS A PROJECT OUT OF THE BUSINESS STUDENTS I UNDERSTAND. IT'S CALLED I.O.U U.S.A AND IT SHOULD BE -- [LAUGHTER] OKAY. I THINK WE'RE READY TO JUMP INTO OUR PANEL. THANK YOU ALL FOR BEING HERE WITH US. IN OCTOBER OF LAST YEAR THE EXECUTIVE VICE-PRESIDENT OF THE FEDERAL RESERVE BANK OF NEW YORK, WILLIAM DUDLEY, GAVE A SPEECH ENTITLED MAY YOU LIVE IN INTERESTING TIMES, BASED ON THE WELL-KNOWN CHINESE SAYING. IN THAT SPEECH HE PREDICTED MUCH OF WHAT WE HAVE SEEN COME TO PASS IN THE LAST FEW MONTHS AND WEEKS. ACCORDING TO WIKIPEDIA, THOUGH, THE PROPER TRANSLATION OF THIS CHINESE SAYING IS: IT IS BETTER TO BE A DOG IN A PEACEFUL TIME THAN TO BE A MAN IN A CHAOTIC PERIOD AND THAT TRANSLATION SEEMS TO SUIT OUR CURRENT ECONOMIC OUTLOOK PRETTY WELL. WE HAVE WITH US TODAY SOME VERY DISTINGUISHED PANELISTS WHO WILL HELP US UNDERSTAND THE CHAOTIC EVENTS ALL AROUND US. WE WERE TALKING BEFORE THE EVENT AND DECIDING THAT WE NEEDED TO CAUTION YOU THAT EVENTS ARE CHANGING SO RAPIDLY THOUGH THAT THE SHELF LIFE OF WHAT YOU'RE ABOUT TO HEAR COULD BE AS LITTLE AS THE HOUR AND A HALF OF THE -- [LAUGHTER] FIRST WANT TO INTRODUCE TO YOU MR. TIM ANDERSON, A PRINCIPAL OF HALBERT HARGROVE AND COMPANY A 1977 BUSINESS ADMINISTRATION GRADUATE OF PACIFIC LUTHERAN, A CPA PSF -- PFS AND HAS SERVED IN SEVERAL LEADERSHIP ROLES AT BOTH THE CHAPTER AND STATE LEVELS OF THE CALIFORNIA SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS. PREVIOUSLY BASED IN LONDON, ENGLAND, MR. ANDERSON WAS FOUNDER, PRINCIPAL AND DIRECTOR OF FALCON REAL ESTATE INVESTMENT COMPANY LIMITED, SERVICING INSTITUTIONAL AND INDIVIDUAL PROPERTY INVESTORS IN EUROPE, THE MIDDLE EAST AND AFRICA. BETWEEN 1988 AND 1991 MR. ANDERSON WAS VICE-PRESIDENT OF CHASE MANHATTAN BANK -- PRIVATE BANKING, OVERSEEING PRIVATE, CLIENT INVESTMENT IN THE BANK'S EUROPE, MIDDLE EAST AND AFRICAN DIVISIONS. HE'S AN ACTIVE MEMBER OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS AND HAS EARNED AND MAINTAINED THE ACCREDITED INVESTMENT FIDUCIARY DESIGNATION FROM THE CENTER FOR FIDUCIARY STUDIES AT THE UNIVERSITY OF PITTSBURGH GRADUATE SCHOOL OF MANAGEMENT. PLEASE WELCOME MR. ANDERSON TO THE BEACH. [ APPLAUSE ] ROBERT SCHACK HAS BEEN IN THE BANKING BUSINESS FOR MORE THAN 40 YEARS, STARTING AS A SUMMER TRAINEE AT SECURITY PACIFIC BANK WHILE ATTENDING CALIFORNIA STATE UNIVERSITY LONG BEACH, GO BEACH. HE HAS BEEN SENIOR VICE-PRESIDENT AND DIVISION MANAGER IN SECURITY PACIFIC'S CALIFORNIA MIDDLE MARKET GROUP. IN 1992 HE JOINED FIRST BUSINESS BANK IN LOS ANGELES AS REGIONAL VICE-PRESENT. IN 1998 MR. SCHACK CO-FOUNDED AMERICAN BUSINESS BANK, A COMMERCIAL BANK SPECIALIZING IN SERVING MEDIUM SIZED COMPANIES IN SOUTHERN CALIFORNIA. MR. SCHACK SERVES ON NUMEROUS BOARDS THROUGHOUT THE COMMUNITY INCLUDING THE YMCA AND THE ORANGE COAST MEMORIAL MEDICAL CENTER. HE'S ON THE BOARD OF GOVERNORS AND WAS THE PAST CHAIRMAN OF THE CORPORATE SCHOLARS COUNCIL AT CALIFORNIA STATE UNIVERSITY LONG BEACH, AND HE IS AN AMBASSADOR FOR HIGHER EDUCATION FOR THE CALIFORNIA STATE UNIVERSITY SYSTEM, OBVIOUSLY DEDICATED TO EDUCATION, AND A MEMBER OF THE PEPPERDINE GRAZIADIO GRADUATE BUSINESS SCHOOL BOARD OF VISITORS. MR. SCHACK HOLDS BS AND MBA DEGREES FROM CALIFORNIA STATE UNIVERSITY LONG BEACH AND AN EXECUTIVE MBA FROM UCLA. [APPLAUSE] LISA GROBAR IS A PROFESSOR OF ECONOMICS AT CALIFORNIA STATE UNIVERSITY LONG BEACH AND SERVES AS DIRECTOR OF THE CSULB ECONOMIC FORECAST. SHE IS A REGIONAL ECONOMIST WITH A SPECIALIZATION IN THE CALIFORNIA ECONOMY. HER PROFESSIONAL WRITINGS HAVE APPEARED IN A WIDE VARIETY OF SCHOLARLY JOURNALS AS WELL AS NUMEROUS OTHER PUBLICATIONS. SHE IS RECOGNIZED AS AN EXPERT ON THE SOUTHERN CALIFORNIA ECONOMY AND IS FREQUENTLY QUOTED IN THE NATIONAL AND REGIONAL MEDIA CONCERNING REGIONAL ECONOMIC TRENDS. DR. GROBAR RECEIVED HER PHD FROM THE UNIVERSITY OF MICHIGAN. [APPLAUSE] MICHAEL SOLT IS DEAN OF THE COLLEGE OF BUSINESS ADMINISTRATION AT CAL STATE LONG BEACH. HE CAME TO CSULB LAST SPRING AFTER SERVING AS ASSOCIATE DEAN FOR THE LUCAS GRADUATE SCHOOL OF BUSINESS AND AS A PROFESSOR OF FINANCE AT SAN JOSE STATE UNIVERSITY WHERE HE TAUGHT NEW VENTURE AND INTERNATIONAL FINANCE. OVER HIS CAREER DR. SOLT HAS WON TEACHING AWARDS AT SAN JOSE STATE AND THE UNIVERSITY OF CINCINNATI AND HAS PUBLISHED PAPERS IN MANY RESPECTED ACADEMIC JOURNALS INCLUDING THE JOURNAL OF BUSINESS, FINANCIAL MANAGEMENT, THE JOURNEY OF PORTFOLIO MANAGEMENT, THE FINANCIAL ANALYST JOURNAL AND THE AMERICAN BUSINESS LAW JOURNAL. DR. SOLT HAS A BS DEGREE FROM OHIO STATE UNIVERSITY AND AN MBA AND A DOCTORATE OF BUSINESS ADMINISTRATION IN FINANCE FROM INDIANA UNIVERSITY. [APPLAUSE] AND LAST BUT CERTAINLY NOT LEAST, F. KING ALEXANDER WAS SELECTED AS THE SIXTH PRESIDENT OF CALIFORNIA STATE UNIVERSITY LONG BEACH IN NOVEMBER 2005. DR. ALEXANDER IS A WELL RESPECTED EXPERT IN HIGHER EDUCATION IN FINANCE AND PUBLIC POLICY. HIS WORK ON STATE AND NATIONAL HIGHER EDUCATION POLICY HAS BEEN FEATURED IN THE NEW YORK TIMES, THE CHRONICLE OF HIGHER EDUCATION, THE BOSTON GLOBE, THE AUSTRALIAN AND THE ECONOMIST. HE IS A FREQUENT CONTRIBUTOR TO MANY NATIONAL PUBLICATIONS AND HAS BEEN ASKED ON NUMEROUS OCCASIONS TO TESTILY BEFORE THE U.S. CONGRESS ABOUT TRENDS IN HIGHER EDUCATION AND FINANCE, AFFORDABILITY AND PUBLIC POLICY. THIS PAST YEAR DR. ALEXANDER PLAYED AN IMPORTANT LEADERSHIP ROLE IN REPRESENTING OVER 450 PUBLIC UNIVERSITIES IN ADVOCATING FOR THE ADOPTION OF A SERIES OF NEW FEDERAL AMENDMENTS TO THE HIGHER EDUCATION ACT INCLUDING A FIRST EVER MAINTENANCE OF EFFORT PROVISION YEAR ROUND PELL GRANTS AND ADDITIONAL FUNDING FOR HISPANIC SERVING INSTITUTIONS AND PUBLIC BLACK COLLEGES AND UNIVERSITIES. [APPLAUSE] SO, IT'S CLEAR THAT WE HAVE A VERY DISTINGUISHED PANEL OF EXPERTS WITH US AND LET'S DELVE INTO THE DEEP FINANCIAL WATERS BEGINNING WITH MR. ANDERSON. MR. ANDERSON WHAT IS THE SUBPRIME CRISIS AND HOW DID WE GET INTO THIS MESS? >> AND I'M SUPPOSED TO LEAVE TIME FOR EVERYONE ELSE TO TALK? [LAUGHTER] WHAT IS THE SUBPRIME CRISIS, FIRST OF ALL LET ME PREFACE MY REMARKS BY SAYING THAT MY PERSPECTIVE COMES THROUGH THE LENSES OF AN INVESTMENT MANAGER AND IN MY DEALINGS IN THE CAPITAL MARKETS, U.S. AND NON-U.S. [INAUDIBLE] FIXED INCOMES AND SECURITIES SO, THAT'S WHERE MY PERSPECTIVE COMES FROM, AND I THINK I'M GOING TO START ACTUALLY WITH A BRIEF EXPLANATION OF WHAT A SUBPRIME MORTGAGE IS AND IT'S A LITTLE MORE COMPLICATED THAN ANYTHING THAT'S NOT A SUBPRIME MORTGAGE. WHAT IT BASICALLY ENTAILS ARE REDUCED UNDERWRITING STANDARDS AND I KNOW MY COLLEAGUES IN THE BANKING INDUSTRY MIGHT CALL IT MORE THAN REDUCED BUT WHAT IT REALLY MEANS IS THERE ARE LESS REQUIREMENTS TO GET A MORTGAGE IN TERMS OF VERIFICATION OF INCOME, VERIFICATION OF JOB, VERIFICATION OF ASSETS THOSE KINDS OF THINGS WERE RELATIVELY ABSENT IN SOME OF THE UNDERWRITING OF THESE MORTGAGES. IF I CAN REMEMBER MY STATISTICS RIGHT, WE LOOKED INTO THIS ABOUT A YEAR AGO LAST AUGUST WHEN THIS STARTED TO UNRAVEL AND THE U.S. MORTGAGE MARKET -- AND ANYBODY WHO WANTS TO HELP ME ON THESE STATS IS WELCOME TO, THE U.S. MORTGAGE MARKET REPRESENTS ABOUT 18 PERCENT OF GDP AND THE SUBPRIME PIECE WAS ABOUT SIX PERCENT OF THAT SO, IN THE CONTEXT OF, QUOTE, THE "OVERALL MORTGAGE MARKET" MEANING MOST OF THE FOLKS OUT THERE ARE STILL PAYING ON THEIR MORTGAGES AND NOT LOSING THEIR HOMES SO IT'S A VERY SMALL PERCENTAGE. HOW DID WE GET HERE, I THINK WE HAVE TO GO BACK QUITE A WAYS, NEARLY TEN YEARS NOW. THERE WAS A PIECE OF LEGISLATION CALLED THE COMMUNITY REINVESTMENT ACT THAT BASICALLY MANDATED SOME LENDERS TO REDUCE THEIR UNDERWRITING STANDARDS ON SOME MORTGAGES AND LIKE ANY PIECE OF LEGISLATION IT NEEDS ALSO TO HAVE SOME OVERSIGHT AND SOME FOLLOW THROUGH AND SO, WHEN THE OPPORTUNITY WAS PRESENTED TO THE MARKETPLACE WITH THESE KINDS OF MORTGAGES BEING WRITTEN, WE BASICALLY PUT IT IN THE HANDS OF A LARGELY UNREGULATED BUSINESS, THE MORTGAGE LENDING BUSINESS AND THE MORTGAGE BROKERAGE BUSINESS, SO IMMEDIATELY THERE WERE OPPORTUNITIES FOR ABUSES AND, IT'S OUR OPINION AND OUR VIEW THAT WE GOT HERE BASICALLY BECAUSE OF WIDE-SCALE ABUSE IN THAT PARTICULAR AREA OF THE MORTGAGE SECTOR. SO, HAVING ESTABLISHED THAT AS OKAY THESE MORTGAGES ARE OUT HERE, WHAT HAPPENS TO THEM? THERE ARE PACKAGERS, COMPANIES ON WALL STREET THAT PUT THESE MORTGAGES TOGETHER ALONG WITH OTHER MORTGAGES, THEY MAKE DIFFERENT AND VARIOUS ASSUMPTIONS ABOUT DEFAULT RATES AND THEY BUILT THOSE ASSUMPTIONS INTO THE YIELDS THAT ARE ESTABLISHED ON THESE SECURITIES AND THEN THEY SELL THEM TO INVESTORS. AND SO, IF YOU HAVE A HOUSING MARKET -- AND I KNOW SOME OF THE FOLKS HERE ARE GOING TO TALK ECONOMICS WILL TALK A LITTLE BIT ABOUT THE HOUSING MARKET, BUT I'LL SAY THAT IT'S ARGUED THAT THE HOUSING MARKET DRIVES PRETTY MUCH EVERYTHING IN THE ECONOMY AND IT'S BECAUSE OF THE CONSUMER EN MASSE AND SO, IF THE HOUSING MARKET BEGINS TO COOL OFF IN OTHER WORDS THERE ARE NOT AS MANY MORTGAGES BEING WRITTEN NOT AS MANY HOUSES BEING PURCHASED A LOT OF HOUSES STILL BEING BUILT, IT CREATES AN OVERSUPPLY SITUATION IN GENERAL -- VERY, VERY GENERAL TERMS AND THIS OVERSUPPLY SITUATION THEN FORCES THE PRICES OF EXISTING HOMES TO GO DOWN AND SO, WHEN THAT BEGINS TO HAPPEN, THE NEXT STEP IS IT LEADS TO DEFAULTS AND THAT REALLY WAS THE TRIGGER HERE, AND LIKE ANY PERFECT STORM AND THIS CAN EASILY BE CONSIDERED SIMILAR TO A PERFECT STORM IT'S KIND OF A CONFLUENCE OF CIRCUMSTANCES AND EVENTS, MANY DIFFERENT CIRCUMSTANCES AND THERE'S BEEN A COUPLE OF DIFFERENT EVENTS THAT CAUSE THESE THINGS TO START TO UNRAVEL. SO THOSE SECURITIES BECAME AT RISK AND QUESTIONABLE AS TO WHAT THEIR REAL MARKET VALUE WAS AND, IF YOU'RE A LARGE COMPANY, A PUBLICALLY TRADED COMPANY LIKE FREDDIE MAC, FANNIE MAE, AIG, LEHMAN BROTHERS -- FREDDIE MAC, FANNIE, WASHINGTON MUTUAL BANK THERE ARE ACCOUNTING RULES CALLED THE MARK TO MARKET RULES, IN SIMPLE TERMS THAT REALLY MEANS, IF YOU DON'T KNOW WHAT YOUR SECURITY IS WORTH AND YOU DON'T HAVE ANYBODY WILLING TO PAY YOU A PRICE FOR IT, YOU HAVE TO WRITE IT DOWN AGAINST CURRENT EARNINGS, AND SO THEY WERE FOLLOWING THE ACCOUNTING RULES. IF YOU LOOK AT SOME OF THESE BIG CORPORATIONS THAT WE MENTIONED AND I AM OVERSIMPLIFYING HERE IN THE INTEREST OF TIME BUT, IF LOOK AT WHAT THESE COMPANIES WERE -- THERE WERE MULTIPLE GLOBAL COMPANIES, MULTI-NATIONAL COMPANIES IN A LOT OF CASES AND THEY HAD VERY PROFITABLE UNITS ELSEWHERE IN THE COMPANY, BUT THERE JUST WASN'T ENOUGH INCOME IN 2008 TO ABSORB THE MAGNITUDE OF WRITE-OFFS REQUIRED UNDER THE ACCOUNTING RULES, AND ONE OF THE THINGS THAT YOU WILL HEAR AS THIS BEGINS TO UNFOLD AND AS MORE DISCUSSION OF THIS SITUATION ENSUES IS THAT THERE IS DISCUSSION OF MAYBE RELAXING THOSE ACCOUNTING RULES OR ALTERING THEM IN SOME WAY SO THAT A LITTLE BIT MORE OF A REALISTIC ACCOUNTING WRITE DOWN FOR PURPOSES OF INSOLVENCY OF A COMPANY. THE THING THAT COMPLICATES THE ISSUE IS THE CERTIFICATES THAT THESE ENTITIES HOLD THAT THESE LARGE SCALE INVESTORS HOLD ARE LIQUID, THERE ARE SOME STATISTICS THAT WILL BE SHARED WITH YOU TODAY ABOUT WHAT PERCENTAGE OF THOSE ARE ACTUALLY BEING -- ACTUALLY BEING PAID ON. THEY STILL HOLD THESE SECURITIES, THEY'RE STILL COLLECTING THE PAST DUE PAYMENTS EVERY MONTH BUT THEY'RE INSOLVENT ON THEIR BALANCE SHEET AND THAT PREVENTS THEM FROM LENDING MONEY AND AT THE BASE OF ANY ECONOMIC ACTIVITY AND ANY KIND OF ECONOMIC GROWTH THERE NEEDS TO BE CREDIT AVAILABLE IN THE MARKETPLACE FOR BUSINESSES TO DO THE THINGS THAT THEY NEED TO DO, FOR PEOPLE TO PURCHASE HOMES OR CARS, WHATEVER ELSE THEY MIGHT BE DOING, FINANCING EDUCATION, CREDIT NEEDS TO BE AVAILABLE FOR THAT AND, IF BANKS ARE INSOLVENT, THEY CAN'T LEND AND SO WHERE WE ARE TODAY IS A WIDE-SCALE GLOBAL LOCKUP IN THE CREDIT MARKETS. IT'S A TERRIBLE OVERSIMPLIFICATION OF WHAT I THINK IS GOING ON OUT THERE AND, AGAIN, WE DON'T NECESSARILY THINK WE HAVE ALL THE ANSWERS BUT, YOU KNOW, BASICALLY TO SUMMARIZE: IT STARTED OUT WITH ENABLING LEGISLATION AND IT WAS FOLLOWED BY A LOT OF ABUSES AND THEN COUPLE THAT SEVERAL YEARS LATER WITH SOFTENING IN THE HOUSING MARKETS, NOT JUST LOCALIZED SOFTENING BUT FAIRLY WIDE SCALE SOFTENING IN THE HOUSING MARKETS, AND YOU PUT THE ACCOUNTING RULES ON TOP OF ALL OF THAT AND ALL OF A SUDDEN YOU HAVE A NEARLY INSTANT CREDIT FREEZE. >> THANK YOU, MR. ANDERSON. I WANT TO TURN NOW TO MR. SCHACK. MR. SCHACK, HOW DOES THE CREDIT CRISIS EFFECT LARGE AND SMALL BUSINESS AND DOES IT HELP OR HURT MAIN STREET? >> WELL, FIRST STOP FOR A MINUTE AND TAKE A MENTAL PICTURE OF WHAT'S GOING ON HERE IN THIS NEXT YEAR, THE PAST YEAR AND THIS YEAR GOING FORWARD, THESE ARE TRULY HISTORIC TIMES IN THE FINANCIAL MARKETS. THEY ARE FRIGHTENING TO A LOT OF PEOPLE, EVERYBODY, THERE IS SO MUCH UNCERTAINTY THAT WHAT'S HAPPENING IS THAT -- IS THAT EVERYBODY IS FREEZING UP. LET'S TALK ABOUT THE CREDIT MARKETS FOR A BIT, I'M -- I AM MAIN STREET, MY BANK IS A MAIN STREET BANK, WE BANK MAIN STREET COMPANIES AND SO -- AND I'M HAPPY TO SAY -- I'M KNOCKING ON WOOD, MY KNUCKLES ARE GETTING CALLOUSES BECAUSE I'M KNOCKING ON WOOD SO MUCH, WE DON'T HAVE ANY OF THESE PROBLEMS THAT ARE BEING EXPERIENCED BY SOME OF THE MAJOR BANKS AND BUT WHAT IS HAPPENING IS THAT -- LET'S JUST TALK ABOUT THE CREDIT MARKET FOR A MINUTE, WHAT IS THE CREDIT MARKET? FOR STARTERS, THE CREDIT MARKET IS AN ENORMOUS MARKET, IT DWARFS THE STOCK MARKET BY HUGE FACTORS AND IT ISN'T -- EVERYBODY THINKS INSTANTLY OF BANKS WHEN THEY THINK OF THE CREDIT MARKETS; THEY'RE GETTING ALL THE TRUST THESE DAYS. THE CREDIT MARKETS REALLY INCLUDE EVERYBODY FROM YOU AND ME, WHEN WE -- IF YOU HAVE A 401K OR YOUR PARENTS DO OR IF YOU HAVE A BOND OF ANY TYPE, YOU'RE A LENDER, YOU'RE LOANING MONEY TO SOMEBODY. IT JUST HAPPENS TO BE A PUBLICALLY TRADED DEBT BUT YOU'RE A LENDER, YOU'RE EXTENDING CREDIT. IT GOES SO FAR AS TO SAY THAT YOU -- WHEN YOU A OPEN A CD AT A BANK, YOU'RE LOANING THEM MONEY FOR A SPECIFIED PERIOD OF TIME AND FOR THAT YOU'RE GOING TO GET AN INTEREST RATE BACK FROM IT, SO YOU'RE A CREDITOR. THERE ARE ALL KINDS OF INTERMEDIARIES, COMPANIES THAT HAVE EXCESS CASH BERKSHIRE HATHAWAY WILL SEE THAT, YOU KNOW, FORD MOTOR CREDIT OR GE CAPITAL PROBABLY IS A BETTER EXAMPLE BUT BERKSHIRE HATHAWAY HAS EXCESS CASH, GE CAPITAL NEEDS SOME OVERNIGHT JUST TO MEET PAYROLL BECAUSE THEY HAVE A BIG RECEIVABLE COMING IN THE NEXT WEEK, THEY'LL LOAN THEM MONEY, THIS IS THE COMMERCIAL PAPER MARKET AND SO CORPORATIONS LOAN MONEY TO EACH OTHER. THERE ARE NONBANK LENDERS LIKE FORD MOTOR CREDIT, GE CAPITAL, GMAC, OTHERS THAT GO TO THE CAPITAL MARKETS TO RAISE CASH THAT THEY LOAN MONEY ON CARS, SOMETIMES HOMES, YOU KNOW, AIRPLANES, A VARIETY OF THINGS BUT THEY'RE NOT BANKS AND, OF COURSE, YOU HAVE THE BANKS. TOP TO BOTTOM WHAT WE'RE EXPERIENCING TODAY IS A PANIC, SO FOR STARTERS, RELAX. THIS -- WE'VE BEEN THROUGH THESE KINDS OF THINGS BEFORE, WE'RE GOING TO COME OUT OF THIS AGAIN JUST TRUST ME ON THIS. [LAUGHTER] I'M A BANKER! THE ISSUE HERE IS -- THE ISSUE HERE IS, WHEN FOLKS LIKE YOU AND I MAKE A [INAUDIBLE] START -- I'LL GIVE YOU A COUPLE OF EXAMPLES. I GOT A CALL FROM A PERSON WHO CARRIES A LOT OF MONEY AT THE BANK, LOT OF MONEY AND HE HAD A -- HE HAD A MILLION DOLLARS COMING IN BY WIRE, AND HE SAID I WANT YOU TO BUY ME SOME TREASURIES, JUST 30 DAYS, I'LL NEED IT AGAIN IN 30 DAYS. SO GO, BUY ME A TREASURY BILL AND JUST PAY ME WHAT IT IS. I SAID, HEY, LOOK. JUST PUT IT IN A 30-DAY CD, OUR BANK IS ROCK SOLID. IT'S PERFECTLY OKAY. AND HE SAID, YOU KNOW WHAT, I'VE GOT ENOUGH WITH YOU, I JUST WANT TO HEDGE MY BET A LITTLE BIT. SO I WENT OUT AND I BOUGHT HIM A TREASURY AND FOR $1.2 MILLION DOLLARS FOR 30 DAYS I'M GOING TO PAY HIM -- THE GOVERNMENT IS GOING TO PAY HIM $12 THAT'S LIKE GOING TO STARBUCKS A COUPLE TIMES FOR A MILLION BUCKS, I MEAN, SO THAT'S, YOU KNOW, I'LL EVEN GO ONE STEP FURTHER: ON A PER DAY BASIS TREASURIES WERE ACTUALLY PAYING NEGATIVE INTEREST RATES, YOU KNOW, IF YOU CAN VISUALIZE THIS. I'M GOING TO GIVE THE TREASURY A MILLION DOLLARS AND THEY'RE GOING TO PAY ME BACK -- I'VE GOT TO PAY THEM TWO BASIS POINTS TO HOLD MY MONEY FOR 30 DAYS THAT'S THE DEFINITION OF A PANIC. IT'S IRRATIONAL, IT'S THE OPPOSITE OF RATIONAL EXUBERANCE, AND IT'S GOING THE EXACTLY THE OPPOSITE WAY AND THIS IS JUST US DOING THIS, US IS THE CFOS OF THESE MAJOR CORPORATIONS THAT HAVE CASH AND ARE RELUCTANT TO LEND TO OTHER CFOS BECAUSE THEY WANT TO HOARD IT -- NOT HOARD, BUT THEY WANT TO MAKE SURE THEY RETAIN IT FOR THEMSELVES AND THEY'RE NOT SURE WHAT THEY HAVE ON THE OTHER SIDE. BANKS RECENTLY HAVE NOT WANTED TO LEND TO EACH OTHER. THEY KNOW WHAT KIND OF JUNK THEY HAVE ON THEIR OWN BALANCE SHEETS, SO THEY SAID, THEY KNOW WHAT THEY HAVE BUT THEY DON'T KNOW WHAT THE JUNK THE OTHER GUY HAS, SO BANKS WOULDN'T LEND TO EACH OTHER SO THIS IS -- EVERYBODY IN ALL LAYERS OF SOCIETY HAS JUST -- HAVE JUST TIGHTENED UP. SO WHAT HAPPENS TO BUSINESSES, I'LL GET TO THE ANSWER HERE. WHEN THIS SEIZES UP, IT -- IF YOU HAVE CASH AND YOU NEED TO EXPAND AND YOU CAN USE YOUR OWN CASH RIGHT NOW, YOU'RE FINE. IF YOU, LIKE MOST COMPANIES THAT ARE UNDERCAPITALIZED PARTICULARLY ON MAIN STREET, YOU NEED TO GO TO THE BANK FROM TIME TO TIME TO BORROW FOR EXPANSION AND, IF NOT THAT, THEN BORROW, YOU KNOW, FROM TIME TO TIME FOR WORKING CAPITAL. THE RECEIVABLE CHECK THAT YOU WERE EXPECTING IN THIS WEEK DIDN'T COME IN, I'VE GOT TO MEET A FRIDAY PAYROLL, LET ME BORROW IT FOR A COUPLE OF WEEKS AND, WHEN THE CHECK COMES IN, I'LL PAY THE BANK BACK THAT'S JUST KIND OF THE GREASE THAT MAKES THE ECONOMY GO. WHAT'S HAPPENING IS AND WILL HAPPEN IS THAT AS THESE WRITE DOWNS ARE TAKING PLACE, WITHIN THE BANKS, I'M JUST GOING TO ADDRESS THE BANKS NOW BECAUSE THEY'RE KIND OF EMBLEMATIC OF EVERYTHING ELSE, THE BANKS ARE FIGHTING TWO THINGS: FALLING ASSET VALUES THAT IS IN THE PAPER THEY HOLD, THE MORTGAGES THEY HOLD ARE STARTING TO DEFAULT A LITTLE BIT SO THAT MAKES THAT LOAN WORTH A LITTLE LESS AND THEN WHEN THEY'RE SEEING THE UNDERLYING VALUE OF THE COLLATERAL, MEANING THE SINGLE FAMILY HOMES DECREASING IN VALUE, NOW YOU AS A RATIONAL LENDER, YOU HAVE CASH, GOING TO MAKE A DEPOSIT IN A BANK, IF YOU SUSPECT THAT THE VALUE BEHIND THAT LOAN IS GOING TO BE DROPPING, WHAT'S YOUR RATIONAL DECISION? YOU'RE NOT GOING TO PUT IT IN THERE. YOU'RE NOT GOING TO MAKE THE LOAN. SO WHAT HAPPENS IS THAT THE BANKS ARE FIGHTING THIS FROM A FUNDAMENTAL STANDPOINT AND THEN THERE'S THIS ARTIFICIAL MARK TO MARKET NONSENSE. I'M JUST GOING -- I'M GOING TO RUN OVER BUT -- >> YOU ALREADY DID. >> -- I'VE GOT THE MIKE. JUST TO PUT THIS -- JUST TO PUT THIS WHOLE IDEA OF MORTGAGE BACKED SECURITY IN KIND OF REAL WORLD TERMS, IMAGINE THERE ARE A 1,000 BORROWERS OUT THERE AND ALL THESE LOANS ARE MADE, JUST REGULAR LOANS, AND SO WE HAVE 1,000 PEOPLE MAKING PAYMENTS EVERY MONTH, RIGHT NOW THE DELINQUENCY ON MORTGAGES IS RUNNING ABOUT FOUR PERCENT, DEFAULT RATE IS PROBABLY NINE PERCENT SO LET'S SAY THAT TEN PERCENT OF PEOPLE IN THIS MORTGAGE BACKED SECURITY AREN'T MAKING THEIR PAYMENTS, THAT'S 100 PEOPLE. 900 PEOPLE ARE STILL MAKING THEIR PAYMENTS. LET'S -- INSTEAD OF CALLING IT A SECURITY, LET'S CALL IT A 1,000 UNIT APARTMENT HOUSE WE CAN KIND OF RELATE TO THAT. SAY THANK YOU, WE HAVE 900 PEOPLE MAKING THEIR MONTHLY RENT PAYMENTS AND 100 ARE HAVING TROUBLE AND THEY'RE WORKING THROUGH THOSE. THE VALUE OF THAT APARTMENT HOUSE IS NOT ZERO BUT THAT'S THE BID, PER THE ACCOUNTING RULE I HAVE TO, YOU KNOW, I CAN'T SELL IT TO TIM. I HAVE NO BIDS FOR IT. I HAVE TO TAKE A SNAPSHOT OF MY -- OF MY BALANCE SHEET ON SEPTEMBER 30TH AND, IF I HAVE NO BUYERS FOR IT, I HAVE TO MARK THAT THING TO ZERO IN THE EXTREME CASE THAT APARTMENT HOUSE IS NOT WORTH ZERO SO -- BUT THAT'S WHAT THE ACCOUNTING RULES SAY I HAVE TO DO. SO, WHEN THAT HAPPENS, OKAY, SO I TAKE THIS MILLION DOLLAR APARTMENT HOUSE AND I HAVE A MILLION DOLLAR NET WORTH, I HAVE TO MARK IT TO ZERO, WHAT HAPPENS TO MY NET WORTH, GONE. SO I HAVE A PERFECTLY GOOD APARTMENT HOUSE, A PERFECTLY GOOD -- IT'S A FUNCTIONING, VIABLE BUSINESS AND MY NET WORTH IS WIPED OUT, WELL THAT'S INSOLVENCY AND THAT'S WHAT'S DRIVING SOME OF THESE BANKS UNDER. I THINK THAT'S WHAT HAPPENED TO LEHMAN. IT'S WHAT HAPPENED TO WAMU. IT'S WHAT HAPPENED TO ALL THESE BANKS. THIS IS AN ACCOUNTING RULE THAT HAS A CERTAIN RELEVANCE IN CERTAIN TIMES, IT HAS NO RELEVANCE TODAY. NOW, LET'S JUST TAKE THIS ONE STEP FURTHER FOR [INAUDIBLE] THE -- SO, LET'S SAY I HAVE ENOUGH CAPITAL TO WRITE THIS APARTMENT HOUSE DOWN TO ZERO AND I HAVE TWO MILLION DOLLARS IN NET WORTH. SO I HAVE A MILLION DOLLARS LEFT OVER AND I'VE GOT ENOUGH TO GET ME THROUGH -- THROUGH ALL OF THIS NONSENSE THAT WE'RE EXPERIENCING RIGHT NOW, THIS PANIC AND THEN SOMEBODY STEPS OUT OF THE BUSHES AND SAYS HEY, I'LL GIVE YOU, YOU KNOW, I'LL GIVE YOU $800,000 FOR IT. I THINK YOU'VE GOT A TEN PERCENT DEFAULT RATE. I'LL GIVE YOU 80 FOR IT AND I'LL MAKE TEN PERCENT ON IT PLUS THE, YOU KNOW, THE INTEREST ALONG THE WAY. AND I SELL IT TO HIM, I GET TO WRITE THAT ASSET FROM ZERO RIGHT ON BACK TO 800,000. SO WHAT'S MY NEXT P&L LOOK LIKE? I'M A GENIUS, I'VE MADE A FORTUNE. NEITHER OF THESE ACCOUNTING TREATMENTS IS TRANSPARENT IN ANY WAY. IT DOESN'T REFLECT WHAT'S GOING ON IN THE BUSINESS -- IN THIS BUSINESS MODEL, SO WE HAVE TO FIND ANOTHER WAY. [LAUGHTER] >> YOU'LL GET ANOTHER CHANCE. DR. GROBAR, AS WE ALL KNOW THE FEDERAL GOVERNMENT HAS DECIDED TO ENACT A $700 BILLION BAILOUT. IS THE BAILOUT A BETTER SOLUTION THAN LETTING THE MARKET FORCES WORK THIS OUT? >> WELL, THE CONCEPT OF LETTING MARKET FORCES WORK THINGS OUT WAS ACTUALLY VERY POPULAR IN 1929. THIS IS PRECISELY THE ADVICE THAT PRESIDENT HERBERT HOOVER GOT FROM HIS THEN TREASURY SECRETARY, ANDREW MELLON, WHO ADVISED HIM TO TAKE A HANDS OFF APPROACH TO THE ECONOMY AND TO, QUOTE/UNQUOTE, "ALLOW MARKET FORCES TO LIQUIDATE BAD BUSINESSES" AND IT WAS FELT AT THE TIME THAT TAKING THIS KIND OF PASSIVE APPROACH WOULD ENABLE THE ECONOMY TO SORT OF HEAL ITSELF IN A FAIRLY SHORT PERIOD OF TIME. AT THE SAME TIME THE LEADERS AT THE CENTRAL BANK, OUR NATION'S CENTRAL BANK, THE FEDERAL RESERVE, ENDED UP TAKING A SIMILARLY PASSIVE POLICY STANCE. THEY BASICALLY STOOD BY AND ALLOWED A SERIES OF BANK PANICS TO CAUSE TEN -- LITERALLY TENS OF THOUSANDS OF BANKS TO FAIL ACROSS THE UNITED STATES, SO WE ALL KNOW THE RESULT OF THESE PARTICULAR POLICY CHOICES IT WAS CALLED THE GREAT DEPRESSION. I THINK THAT WE'VE LEARNED SOME IMPORTANT LESSONS FROM THE EXPERIENCE OF THE DEPRESSION, ALTHOUGH, I THINK SOME OF THE LESSONS GOT A BIT DILUTED OVER TIME AND WE HAVE TO COME BACK TO THEM. FIRST AND FOREMOST THE IMPORTANCE OF THE COUNTRY'S FINANCIAL SYSTEM AND THE OVERALL HEALTH OF THE ECONOMY AND THE NECESSITY OF SAFEGUARDING THE HEALTH OF THE FINANCIAL AND BANKING SYSTEM THROUGH REGULATION AND OVERSIGHT. ONE OF THE WAYS THAT WE SORT OF LOST THAT LESSON WAS IN RECENT YEARS WHEN WE ALLOWED SO MUCH OF THIS MORTGAGE ORIGINATION ACTIVITY TO MOVE OUTSIDE OF THE BANKING SYSTEM WHICH MOVED IT OUTSIDE OF THE REGULATORY INFRASTRUCTURE, AND IT'S ESTIMATED THAT AS MANY AS 75 PERCENT OF THESE SUBPRIME LOANS WERE ACTUALLY ORIGINATED BY INDEPENDENT MORTGAGE COMPANIES, THESE ARE COMPANIES THAT ARE JUST SIMPLY -- THEY ONLY NEED TO GET A STATE CHARTER. THERE IS NO COMPREHENSIVE SYSTEM OF OVERSIGHT, SO I THINK THAT LESSON OF THE DEPRESSION HAS COME BACK TO US AGAIN AND THAT WAS A KEY MISTAKE. I THINK THE SECOND KEY LESSON FROM THE DEPRESSION IS THAT WE FOUND THAT MARKET FORCES, WHILE THEY DO WORK, MAY TAKE EXCEEDINGLY LONG TO RESOLVE AN ECONOMIC CRISIS AND IMPOSE AN EXCEEDINGLY HIGH COST ON THE ECONOMY AND THAT A BETTER OUTCOME CAN BE FOUND WITH GOVERNMENT INTERVENTION IN A CRISIS LIKE THIS. SO TO SUMMARIZE REALLY, MY ANSWER TO THE QUESTION IS IT BETTER -- IS THE BAILOUT BETTER OR LETTING MARKET FORCES WORK, CERTAINLY, MY ANSWER IS AN UNQUALIFIED YES BUT NOT JUST TO THE BAILOUT BECAUSE THE BAILOUT IS SORT OF THE PUBLIC RESPONSE THAT WE'VE ALL OBSERVED. THE BAILOUT REALLY INVOLVES WHAT WE CALL FISCAL POLICY THAT IS ACTIONS OF THE TREASURY AND ELECTED -- DECISIONS MADE BY THE ELECTED OFFICIALS, AND I THINK THE BAILOUT IS GOING TO BE AN ELEMENT OF POLICY THAT IS GOING TO HELP US BUT I THINK MUCH MORE IMPORTANT HAS BEEN THE WORK THAT IS BEING DONE BY THE FEDERAL RESERVE BANK ON THE SIDE OF MONETARY POLICY. NOW, THE FEDERAL RESERVE HAS BEEN OPERATING MUCH MORE, YOU KNOW, BEHIND THE SCENES. PEOPLE MAY NOT BE AWARE OF ALL THE THINGS THAT THEY'RE DOING BUT THE FED HAS BEEN, JUST TO ANNOUNCE A FEW OF THE THINGS THAT THEY'VE -- TALK ABOUT A FEW OF THE THINGS THAT THEY'VE ANNOUNCED RECENTLY, EVEN OVERNIGHT I WAS DRIVING INTO CAMPUS THIS MORNING, I HEARD THAT OVERNIGHT THEY CUT THE FED FUNDS RATES THAT'S GOING TO INCREASE LIQUIDITY TO THE BANKING SYSTEM, HELPING BANKS HAVE THE CASH TO LEND TO EACH OTHER AND TO BUSINESSES. ANOTHER THING THAT THE FED ANNOUNCED JUST THIS WEEK WAS THAT THEY ARE GOING TO ENTER THE COMMERCIAL PAPER MARKET. NOW I'VE NOT SEEN THE FED DO THIS BEFORE BUT IT IS AN EMERGENCY MEASURE AND I THINK IT IS APPROPRIATE TO GO IN AND PURCHASE UP COMMERCIAL PAPER, DIRECTLY IN SOME CASES, FROM ISSUERS TO TRY TO EASE UP CREDIT CONDITIONS THERE. I THINK THE WORK OF THE FED IS GOING TO BE VERY, VERY IMPORTANT IN GETTING US OUT OF THIS FINANCIAL CRISIS. YOU KNOW THESE FISCAL AND MONETARY POLICIES DO -- DO IMPOSE SOME COST ON TAXPAYERS BUT I THINK THAT ULTIMATELY THE ALTERNATIVE, THE ONLY ALTERNATIVE WE HAVE AT THIS POINT IS TO ALLOW MARKETS TO FUNCTION ON THEIR OWN. I'M PRETTY SURE A VERY SEVERE RECESSION OR EVEN DEPRESSION COULD RESULT WHICH WOULD BE MUCH MORE COSTLY TO THE AVERAGE AMERICAN. >> THANK YOU. DEAN SOLT, ON TUESDAY THE FEDERAL RESERVE ANNOUNCED IT WOULD BEGIN BUYING THE SHORT TERM DEBT THAT MANY COMPANIES USE TO FUND THEIR DAY-TO-DAY OPERATIONS, WHAT WILL BE THE IMPACT OF THIS MOVE? >> I THINK LISA STARTED ANSWERING THAT QUESTION A LITTLE BIT AND ALLOW ME TO ELABORATE AND MAYBE GIVE A BROADER ANSWER. BEFORE I DO THAT THOUGH LET ME JUST POINT OUT, WE'RE TALKING ABOUT SOME VERY COMPLICATED TOPICS, CONCEPTS AND SOMETIMES MAYBE USING JARGON THAT WE ALL FIND VERY UNDERSTANDABLE BUT, IF YOU MAYBE DON'T HAVE THAT LEVEL OF COMFORT WITH SOME OF THE TERMS, THE COLLEGE OF BUSINESS ADMINISTRATION HAS PREPARED A WEB PAGE WITH A LOT OF LINKS THAT MAY GIVE YOU SOME DEEPER UNDERSTANDING OF SOME OF THESE ISSUES, SO, IF WE MAKE YOU THINK OR MAKE YOU WONDER, THAT'S PROBABLY A GOOD THING BUT HOPEFULLY WE CAN ANSWER SOME OF THOSE BY YOU CAN EITHER GO TO THE MAIN PAGE OF THE UNIVERSITY, CLICK ON OUR LINK OR GO TO OUR COLLEGE OF BUSINESS ADMINISTRATION WEB PAGE AND GET SOME OF THESE ANSWERS. AND THE NOTION HERE ABOUT THIS QUESTION IS ABOUT THE FEDERAL RESERVE BOARD, WE'VE BEEN TALKING ABOUT COMMERCIAL BANKS AND BOB LENDS MONEY, HE BORROWS MONEY FROM DEPOSITORS, SO HE HAS A COMMERCIAL BANK. THE FED, AS WE CALL IT, IS NOT REALLY A COMMERCIAL BANK IT'S A FEDERAL RESERVE BOARD, THERE'S 12 BANKS IN THAT SYSTEM AND AS LISA POINTED OUT ONE OF THE THINGS IT DOES IS SORT OF COORDINATE AND RUN MONETARY POLICY, MONETARY, MONEY, OKAY, SUPPLY OF MONEY, GREATER GROWTH OF MONEY, MAYBE CREATING INFLATION FOR ALL OF US BUT, WHEN WE HAVE MONEY TO PAY BILLS OR TO BUY THINGS, WE SAY WE HAVE LIQUIDITY. SO THE PART OF THAT WE'RE -- I CAN FOCUS ON TODAY WILL BE THE LIQUIDITY. OTHER THINGS THAT THE FED DOES IS THEY SCRUTINIZE BANKS AND THEY -- I GUESS, THOSE ARE TWO OF THE MAIN -- THEY'RE ALSO LIKE A LENDER OF LAST RESORT SOMETIMES, OKAY. THEY'RE THE FEDERAL GOVERNMENT, OR PART OF THE FEDERAL -- THEY'RE NOT REALLY, THEY'RE INDEPENDENT OF THE FEDERAL GOVERNMENT BUT THEY ARE A LENDER OF LAST RESORT FOR OUR MONETARY SYSTEM, AND ANOTHER CONCEPT I MIGHT POINT OUT AND WE'LL GET TO THIS ANSWER IS THERE'S BEEN A FLIGHT TO SAFETY ALSO AND THAT USUALLY MEANS INVESTORS DON'T TRUST ASSETS IN THE PRIVATE SECTOR, THEY WANT TO HOLD U.S. GOVERNMENT SECURITIES WHICH ARE, IN THE SHORT-TERM, ARE TREASURY BILLS AND LONGER TERM ARE TREASURY BONDS. I'M LAYING OUT A LOT OF DIFFERENT IDEAS HERE IN THIS SORT OF ANSWER TO THIS, COUPLE OF OTHER CONCEPTS I'LL THROW OUT: FOR THOSE WHO ARE BUSINESS MAJORS YOU KNOW WHAT ASSETS AND LIABILITIES ARE AND THAT'S CALLED THE BALANCE SHEET OF THE FIRM, AND THE BALANCE SHEET EQUATION IS ASSETS MUST EQUAL LIABILITY PLUS EQUITY AND I THINK THIS IS WHERE BOB WAS TALKING ABOUT THE MARK TO MARKET RULES CAN MESS THAT UP SOMETIMES BUT ASSETS AND LIABILITIES ARE TWO IMPORTANT THINGS TO BUSINESSES. VALUE IS CREATED FROM ASSETS IN SORT OF THE REAL SECTOR, THE PRODUCTS THAT BUSINESSES MAKE, THE SERVICES THAT THEY OFFER THEY'RE SUPPORTED BY THE ASSETS OF THE FIRM THAT CREATES VALUE. BUT THE BALANCE SHEET EQUATION SAYS THEY HAVE TO BE FINANCED, SO YOU HAVE TO HAVE SOMEONE WILLING TO LEND YOU MONEY OR BUY YOUR STOCK SO THAT YOUR FINANCING EQUALS YOUR ASSETS. AND BOB TOUCHED ON THIS TOO, ANOTHER TWO WORDS I'LL THROW OUT ARE ILLIQUIDITY AND INSOLVENCY. BOB'S EXAMPLE OF INSOLVENCY WAS WHERE, YOU KNOW, YOUR ASSETS CANNOT SUPPORT YOUR LIABILITIES AT ALL; YOU'RE INSOLVENT, OKAY. BUT THIS QUESTION THAT DR. DOWELL ASKED ME WAS ABOUT THE FED BUYING UP SHORT-TERM DEBT OF COMPANIES THAT IS A LIQUIDITY PROBLEM. FIRMS ARE ILLIQUID RIGHT NOW BECAUSE THE BANKS WON'T LEND TO THEM OR MAYBE MONEY MARKET AND MUTUAL FUNDS WON'T LEND TO THEM BY BUYING THEIR COMMERCIAL PAPER, SO IT'S NOT INSOLVENCY FOR THESE SMALL BUSINESSES, IT'S ILLIQUIDITY. THEY JUST DON'T HAVE THE CASH RIGHT NOW TO PAY THEIR BILLS AS THEY COME DUE. TWO OTHER CONCEPTS I'LL THROW OUT THAT I THINK ARE OPERATING RIGHT NOW, GREED AND FEAR. OKAY. YOU KNOW, WALL STREET WAS, I GUESS YOU CAN SAY, PRETTY GREEDY DURING THIS PENDULUM SWINGING ONE WAY WHERE THEY COULDN'T CREATE ENOUGH OF THESE EXOTIC THINGS CALLED COLLATERALIZED DEBT OBLIGATIONS. CEOS, I GUESS THE CREDIT SQUABS, THE CREDIT DEFAULT SQUABS STARTING FROM HUNDREDS OF BILLIONS OF DOLLARS, SOME OF THESE FIRMS TURNED THEM INTO TRILLIONS AND TRILLIONS OF DOLLARS LIKE A HOUSE OF CARDS THOSE ARE WHAT ARE COLLAPSING AND, YOU KNOW, GREED IS ALL PART OF THAT. I INVEST TOO, I WANT MY ASSETS TO GROW IN THE LONG-TERM SO PERHAPS I'M A LITTLE BIT GREEDY ALSO. I THINK THE PENDULUM REALLY SWANG VERY FAR. WELL, WHEN THE PENDULUM STARTS TO SWINGING BACK THE OTHER WAY, WE WENT TOO FAR IN THE OTHER DIRECTION; COMPLETE FEAR, COMPLETE FEAR RIGHT NOW. IN BOB'S ANSWER HE HINTED AT THAT WHERE BANKS DIDN'T EVEN WANT TO LEND TO EACH OTHER, SO HERE WE HAVE THESE ASSETS AND LIABILITIES OF THESE FIRMS THAT ARE ILLIQUID. THEY NEED CASH TO PAY THEIR PAYROLLS, TO BUY RAW MATERIAL, TO PAY THEIR VENDORS, THEY'RE NOT INSOLVENT, THESE ARE GOOD BUSINESSES BUT THEY'RE ILLIQUID. SO WHAT HAPPENS, WE HAVE A LOT OF FEAR IN THE SYSTEM, WE TALKED ABOUT BEING FROZEN THE BANKING SYSTEM BEING FROZEN, NO CREDIT BEING AVAILABLE, SO WHERE ARE THEY GOING TO GO: THE LENDER OF LAST RESORT, OKAY. THE FED IS STEPPING IN TO BUY SOME OF THESE -- OR LEND MONEY TO THESE SHORT-TERM -- SHORT-TERM NEEDS OF BUSINESSES AND THAT'S PROBABLY A GOOD THING. IF YOU WANT TO SEE THIS, THE FEDERAL RESERVE WEB PAGE DESCRIBED IT, IT WAS A ONE-PAGE DOCUMENT, OKAY, IT'S YESTERDAY. THEY SAID, OKAY, WE WILL SPEND, I DON'T KNOW $160 BILLION OR WHATEVER THE NUMBER IS, WE WILL BUY ONLY QUALITY ASSETS, THEY HAVE TO BE RATED A1 OR BETTER, AND WE WILL BE SUPERVISING THESE ASSETS. WE WANT TO MAKE SURE THAT THERE'S ENOUGH COLLATERAL BEHIND THESE AND THIS WILL LAST FOR ONE YEAR. SO THE FED IS BEING VERY CLEAR ABOUT THIS PROGRAM TO INJECT LIQUIDITY INTO THESE BUSINESSES SO THEY CAN PAY YOUR PAY. THEY CAN SEND MONEY TO YOUR FIRM FOR THE RAW MATERIALS THEY BOUGHT FROM YOU, SO THAT WE CAN STAY -- OUR ECONOMY CAN KEEP GOING AND SO THAT THE 90 PERCENT OF THE LOANS THAT AREN'T DEFAULTING, PEOPLE CAN EARN THEIR INCOME TO PAY THESE AND THE LAST THING ABOUT THIS, THE FLIGHT TO SAFETY, I GUESS THAT'S WHY THE BANKS ARE LENDING TO EACH OTHER, THEY'RE BUYING TREASURY BILLS FROM THE FEDERAL GOVERNMENT. SO THE FED IS STEPPING IN TO PROVIDE LIQUIDITY TO THE FIRMS THAT NORMALLY WOULD COME FROM OTHER CHANNELS AND HOPEFULLY THAT WILL LEAD TO A SOFTER LANDING THAN OTHERWISE. >> THANK YOU. PRESIDENT ALEXANDER, HOW WILL THE CURRENT ECONOMIC SITUATION AFFECT THE PUBLIC SCHOOLS OF CALIFORNIA? >> MANY OF THE PANELISTS KNOW A LOT MORE ABOUT CAPITAL MARKETS THAN I BUT I'D LIKE TO REMIND EVERYBODY IN THE ROOM OF ANOTHER TYPE OF INVESTMENT: IT'S NOT PROPERTY, IT'S NOT STOCKS, BONDS BUT IT'S IN HUMAN CAPITAL AND THE GREAT ISSUE OF HUMAN CAPITAL IS THAT IT IS THE MOST STABLE INVESTMENT THAT WE'VE SEEN SINCE 1963 WHEN THEODORE SCHULTZ WON THE NOBEL PRIZE FOR HUMAN CAPITAL INVESTMENT THEORY AND IT DEMONSTRATED THAT FOR OUR STUDENTS, YOUR INVESTMENT ACTUALLY IS SECURED; YOUR INVESTMENT IN YOUR OWN EDUCATION. IN FACT, YOUR RETURN -- YOUR INDIVIDUAL RETURN RATE ON THE INVESTMENT THAT YOU'RE WORKING TO ATTAIN RIGHT NOW IS ROUGHLY BEEN ABOUT 12 TO 14 PERCENT FOR THE LAST 40 PLUS YEARS AND THAT IS UNCHANGED NOT JUST IN THE UNITED STATES BUT IT'S UNCHANGED THROUGHOUT THE OECD WORLD. THE SOCIAL INVESTMENT RATE OF INVESTING IN YOUR EDUCATION BY OTHERS HAS REMAINED UNCHANGED, BASICALLY, AN EIGHT TO TEN PERCENT RETURN RATE TO EVERYBODY ELSE IN SOCIETY TO MAKE SURE THAT YOU CAN HAVE EDUCATIONAL OPPORTUNITIES AND YOU PURSUE YOUR DEGREE AND YOU FINISH YOUR DEGREE AND YOU BECOME REVENUE PRODUCING CITIZENS OF THE STATE OF CALIFORNIA AND OTHER STATES. SO, WHEN WE TALK ABOUT INVESTMENTS, THE GREATEST INVESTMENT, MOST STABLE INVESTMENT THAT WE'VE SEEN FOR NEARLY 50 YEARS SINCE WE STARTED MEASURING EDUCATIONAL ECONOMICS IS ACTUALLY IN YOU. IT'S IN THE HUMAN CAPITAL OF THE NATION, IT'S IN THE HUMAN CAPITAL OF THE CHILDREN, IT'S IN THE HUMAN CAPITAL OF STUDENTS SO THAT'S GOOD NEWS. THE OTHER -- THERE'S, I THINK, EVEN BETTER NEWS TO SOME EXTENT, THIS IS THE FIRST TIME I'VE SEEN WHEN WE'VE HAD AN ECONOMIC DOWNTURN THAT WE DIDN'T SCAPEGOAT THE PUBLIC SCHOOLS AND BLAME THE PUBLIC SCHOOLS FOR ALL THE ECONOMIC PROBLEMS IN THE UNITED STATES BECAUSE IT'S INTERESTING BECAUSE, WHEN THE ECONOMY IS ROLLING WELL, NOBODY EVER CREDITS OUR PUBLIC SCHOOLS. NOBODY EVERY CREDITS THE PUBLIC SCHOOLS FOR DOING WELL AND PLAYING A ROLE IN EDUCATING PEOPLE TO BUILD THE ECONOMY. SO I FIND WITH GREAT INTEREST NOW THAT WE'VE IN MANY WAYS VILIFIED THOSE THAT HAVE DRIVEN THE ECONOMY INTO THE GROUND, NOW WE NEED TO WORK ON CONSTRUCTIVE SOLUTIONS TO DIG OUR WAY OUT. ON THE BAD SIDE OF THINGS, PUBLIC EDUCATION IS REVENUE RELIANT, TAX REVENUE RELIANT. THE LESS PEOPLE ARE SPENDING, THE MORE PEOPLE THAT ARE UNEMPLOYED, THE LESS PEOPLE ARE MAKING, THE LESS TAX REVENUES THAT WILL ACCRUE TO A STATE LIKE CALIFORNIA OR ANY STATE. SO, RIGHT NOW WE IN SORT A SORT OF IN A SWIRL OF TRYING TO FIGURE OUT WHERE OUR REVENUES ARE GOING TO BE. LAST YEAR IT CERTAINLY STARTED, THIS YEAR WE'RE SEEING REVENUES DECLINE, WHEN PEOPLE ARE IN TROUBLE WHEN PEOPLE ARE HURTING, REVENUES DECLINE TO THE STATE SO THERE'S A COMPOUNDING EFFECT. NOW, THAT HITS US THE HARDEST AS A UNIVERSITY BECAUSE WE'RE 40 PLUS PERCENT RELIANT ON THESE REVENUES THAT COME FROM THE CITIZENS OF CALIFORNIA. MY GREATER CONCERN IS FOR OUR SCHOOL -- OUR COLLEAGUES IN OUR PUBLIC SCHOOLS BECAUSE NOT ONLY ARE THEY RELIANT ON THESE REVENUES AND THESE STATE FUNDING ISSUES AND DECISIONS AND CUTS OR LACK OF ADDITIONAL FUNDING TO SUPPORT THE STUDENTS WHO NEED IT BUT THEY'RE VERY PROPERTY TAX RELIANT, AND WE'VE ALREADY SEEN STATES LIKE FLORIDA GOING THROUGH REASSESSMENTS OF PROPERTY VALUE. THEY'VE DROPPED 20 PERCENT ON THE HOMES IN FLORIDA WHICH MEANT THAT PROPERTY TAXES HAVE GONE DOWN 20 PERCENT FOR MANY PEOPLE WHICH ON THE SURFACE MAY SOUND VERY GOOD BUT IN ADDITION TO THAT THAT MEANS THE NET WORTH OF THE FAMILY OWNING THE HOME -- FOR MOST PEOPLE THE NET WORTH OF THEIR FAMILY, THE BULK OF THEIR NET WORTH IS VESTED IN THEIR HOMES, IS VESTED IN WHERE THEY LIVE AND IN ADDITION THE PUBLIC SCHOOLS HAVEN'T EVEN BEGUN TO FEEL THE RAMIFICATIONS OF REDUCING 20 PERCENT OF THEIR BASE THROUGH PROPERTY TAXES WHICH MAY NOT HIT THIS YEAR BUT WILL PROBABLY HIT NEXT YEAR OR THE YEAR BEYOND THAT THAT'S PARTICULARLY RELEVANT TO A STATE LIKE CALIFORNIA WHO HAS ALREADY SOME OF THE LARGEST STUDENT/TEACHER RATIOS IN OUR SCHOOLS, WHO HAS FALLEN TO 49TH IN TAX EFFORT AND SUPPORT OF ITS CHILDREN OF WHICH WE SPENT A LOT OF OUR TIME AS A UNIVERSITY HELPING OUR SCHOOLS OFFSET THESE FINANCIAL CHALLENGES THAT THEY FACE EVERYDAY. SO WITH REVENUES DECLINING, PEOPLE NOT SPENDING, I THINK YOU'RE CERTAINLY GOING TO SEE THESE REVENUES DECLINE. THE HOLIDAY EXPECTATIONS ARE GOING TO BE WAY BELOW WHAT WE'VE SEEN PROBABLY IN A DECADE OR BEYOND THAT THAT ALSO MEANS THAT THE RAMIFICATIONS WILL COME BACK TO HIGHER EDUCATION INSTITUTIONS. IT WILL ALSO IMPACT OUR SCHOOLS WHICH MEANS IT IMPACTS US FROM TOP TO BOTTOM AS INSTITUTIONS OF HIGHER EDUCATION THAT DOESN'T MEAN WE CANNOT AND WE DO NOT HAVE TO MAKE THE RIGHT INVESTMENT DECISIONS ON THE FUTURE. AND I WOULD JUST ENCOURAGE EVERYBODY TO PAY CLOSE ATTENTION TO THE TYPES OF INVESTMENTS THAT WE MAKE IN THE STATE OF CALIFORNIA AND OTHERS BECAUSE HUMAN CAPITAL, HUMAN CAPITAL, INVESTMENTS IN YOU AS STUDENTS, INVESTMENTS IN CHILDREN AND INVESTMENTS IN SO MANY OF US THAT HAVE GONE ON TO GET DEGREES HAVE ACTUALLY PROVEN TO BE THE MOST STABLE INVESTMENT THAT ANY STATE OR SOCIETY COULD MAKE. AND I'D LIKE US TO PAY A LITTLE MORE ATTENTION TO THE TYPE OF INVESTMENTS THAT BUILD ECONOMIES IN THE LONG-TERM INSTEAD OF THE TYPE OF ECONOMIC GAINS THAT PEOPLE LIKE TO ENJOY FOR A FEW YEARS HERE AND A FEW YEARS THERE. SO, WE'RE HERE IN A DIFFICULT SITUATION, REVENUES, PROPERTY TAX ISSUES FOR OUR SCHOOLS, WE NEED TO WORK TOGETHER BECAUSE THIS ISSUE ACTUALLY WILL IMPACT THE ENTIRE STATE OF CALIFORNIA AND OUR GRADUATES ARE GOING TO PULL US OUT OF THIS MESS OR WE'RE NOT GOING TO BE ABLE PULL OUT OF THIS MESS DOWN THE ROAD. THANK YOU, DAVE. >> THANK YOU. AND WE ARE RUNNING BEHIND SO I'D ASK THE PANELISTS TO TRY TO GIVE VERY CRISP ANSWERS TO OUR NEXT ROUND. BACK TO MR. ANDERSON, WHY HAVE THE MARKETS BEEN SO VOLATILE THIS SUMMER AND WHAT SHOULD THE INDIVIDUAL INVESTOR DO? >> WELL, IN A WORD PSYCHOLOGY. LET ME ELABORATE A LITTLE BIT MORE FIRST BY DEFINING VOLATILITY. AS AN INVESTMENT BANKER WE LOOK AT BOTH DOWNSIDE AND UPSIDE VOLATILITY AND BOTH PRESENT RISKS TO US IN TERMS OF ANY CLIENTS INVESTMENT PORTFOLIO. WHEN YOU LOOK AT WHAT THE VOLATILITY HAS BEEN TAKING PLACE NOT JUST THIS SUMMER IT'S BEEN KIND OF EXACERBATED THIS SUMMER BUT IT REALLY STARTED BACK IN SEPTEMBER AND OCTOBER OF 2007, SO IT BEGAN TO CREATE SOME UNCERTAINTY AND YOU HAVE TO -- THIS IS MY OPINION, YOU HAVE TO POINT A LITTLE BIT TO THE FINANCIAL PRESS AND THE OVERALL PRESS, THEY DON'T TELL YOU GOOD NEWS. THEY DON'T TELL YOU THAT ALL PLANES LANDED SAFELY AT LAX YESTERDAY. THEY TELL YOU, LOOK AT THIS, LOOK AT THIS POOR FAMILY IN KANSAS AND WHAT THIS WHOLE THING HAS DONE TO THEIR LIVES OR LOOK AT THIS SITUATION OVER HERE OR LOOK AT THIS BAD SITUATION OVER THERE, SO NATURALLY AS WE LOOK AT THE TELEVISION AND LISTEN TO IT DAY AFTER DAY IT BEGINS TO CREATE SOMEWHAT OF A SELF-FULFILLING PSYCHOLOGY, IF YOU WILL, AND PEOPLE BEGIN TO BELIEVE IT. AND I'M GOING TO VENTURE ON TO GIVING YOU GUYS A LITTLE HOPE HERE TODAY. BEEN DOING THIS FOR 30 YEARS, I ENTERED THE BUSINESS IN '74 OR '75 WHERE THE COVER OF BUSINESS WEEK MAGAZINE SAID STOCKS ARE DEAD. WELL, THAT WAS OVER 30 YEARS AGO AND I'M STILL HERE AND I'M STILL IN MY BUSINESS AND MY PARTNERS ARE STILL IN THEIR BUSINESS. I WAS AROUND IN OCTOBER 17TH, 1987, OCTOBER 19TH, 1987, WHEN THE DOW DROPPED 20 PERCENT IN A SINGLE DAY. WE WERE DEFINITELY OPENING THE SCOTCH THAT AFTERNOON, AND I WAS OLD ENOUGH TO DRINK IT AT THAT TIME. I ALSO WAS AROUND FOR THE RUSSIAN CURRENCY CRISIS, THE LONG-TERM FUNDING -- LONG-TERM CAPITAL MANAGEMENT SITUATION IN LATE '90'S. I WAS AROUND FOR THE TECH BUBBLE. I WAS AROUND FOR 9/11. I'M AROUND FOR THIS ONE, AND THEY ARE ALWAYS DIFFERENT CIRCUMSTANCES THAT CREATE THIS KIND OF PSYCHOLOGY IN THE MARKETPLACE BUT THEY ARE NEVER ANY DIFFERENT EFFECTS ON THE CAPITAL MARKETS AND THE PRICING OF SECURITIES THAT ARE HELD BY INVESTORS, SO THERE IS A HUGE DIFFERENCE. AND SO, WHEN WE COUNSEL CLIENTS -- AND WE HAVE BEEN DOING A LOT OF THAT LAST COUPLE OF WEEKS THEY HEAR THAT IT'S DIFFERENT THIS TIME, IT'S A GLOBAL DEPRESSION, YOU KNOW WE JUST KIND OF LAUGH. IT'S VERY HYSTERICAL AND VERY OVERBLOWN. YES, THESE ARE DIFFICULT PERIODS BUT, IF YOU LOOK HISTORICALLY AT THE CAPITAL MARKETS, ON AVERAGE ABOUT ONE IN FIVE YEARS ONE OF THESE KINDS OF THINGS COME ALONG AND SO WE TELL INVESTORS IN THE BEGINNING, LOOK THESE ARE SOME OF THE REALITIES OF THE MARKETPLACE. IF YOU CAN'T GET YOUR ARMS AROUND THE NOTION THAT YOUR INVESTMENTS ARE GOING TO LOSE MONEY ONE IN FIVE YEARS, YOU REALLY SHOULDN'T BE IN THE STOCK MARKET. OUR FAVORITE INDIVIDUAL CLIENTS ARE PHYSICIANS, YOU KNOW, YOU TELL THEM THEY'RE GOING TO LOSE ONE IN FIVE PATIENTS THEY LOOK AT YOU LIKE YOU'RE CRAZY, AND IT'S JUST NOT THE SAME KIND OF AN ENVIRONMENT; IN THE CAPITAL MARKETS THESE THINGS CAN HAPPEN. SO WHAT DO INDIVIDUAL INVESTORS DO, WHAT DO WE ADVISE OUR INDIVIDUAL INVESTORS TO DO? AND I'LL SEPARATE THEM FROM INSTITUTIONAL INVESTORS THEY HAVE DIFFERENT ISSUES TO DEAL WITH. THEY HAVE FIDUCIARY STANDARDS TO COMPLY WITH, IT'S A DIFFERENT SCENARIO. FOLKS LIKE YOU AND ME THAT HAVE THEIR MONEY IN THE MARKET OR ARE THE FOLKS THAT HAVE MONEY IN THE MARKET THE BEST THING TO DO IS BE BOLD. WE'RE -- A COUPLE OF CLIENTS HAVE BEEN VERY, VERY SURPRISED THE LAST COUPLE OF DAYS, WELL WHAT ARE YOU DOING? WELL, WE'RE REBALANCING IN THIS MARKET. WHAT REBALANCE MEANS IS, IF YOU HAVE A 50/50 EQUITY AND BOND PORTFOLIO AND YOUR EQUITY HAS DROPPED TO 40 PERCENT, WE GO BUY TEN PERCENT MORE TO BRING YOU BACK UP TO 50/50. SO IT'S KIND OF COUNTERINTUITIVE TO SAY YOU'RE BUYING INTO THIS MARKET, WELL THAT'S BECAUSE WE'VE BEEN THROUGH THEM BEFORE, WE KNOW MARKETS DO RECOVER. CAN'T TELL YOU HOW LONG THIS ONE IS GOING TO TAKE BUT I CAN TELL YOU THAT IT WILL RECOVER. MARKET DISLOCATIONS HAVE TAKEN PLACE LONG BEFORE I EVER GOT INTO THIS BUSINESS AND LONG BEFORE MY PREDECESSORS EVER GOT INTO THIS BUSINESS; IT'S A MATTER OF HISTORY. GETTING KIND OF PHILOSOPHICAL HERE BUT PEOPLE PICK THEMSELVES UP AND MOVE ON AND THEY ADJUST AND IN AMERICA, IN PARTICULAR, CAPITAL MARKETS ADJUST VERY QUICKLY. SO, DON'T LOSE HOPE AND THE FINAL THING I WOULD SAY, IF YOU'RE CONSIDERING BEING AN INVESTOR, GET INTO THE MARKET WITH A PLAN AND DON'T PUT A DOLLAR IN THE MARKET UNTIL YOU'VE ACTUALLY WRITTEN A PLAN. WE CALL THAT A WRITTEN INVESTMENT POLICY, IT'S KIND OF LIKE, IF YOU'RE GOING TO GO INTO A BUSINESS, WRITE A BUSINESS PLAN BEFORE YOU PUT ANY MONEY INTO YOUR BUSINESS SO YOU KNOW WHAT DECISIONS YOU NEED TO MAKE AND HOW TO MAKE THOSE DECISIONS WHEN YOU'RE CONFRONTED WITH THEM. SO THAT'S BEEN PART OF THE PROBLEM WE SEE IS THE PEOPLE THAT YOU SEE PANICKING AND THE FEAR YOU SEE IN THE MARKETPLACE ARE BASICALLY PEOPLE THAT DON'T KNOW WHAT THEY'RE DOING IN THERE. THEY DON'T HAVE A PLAN AND/OR THEY ARE SPECULATORS PLAYING MOMENTUM ONE WAY OR ANOTHER. SO, SORRY I WENT OVER TIME BUT I WANTED TO TELL EVERYBODY THIS IS NOT THE END OF THE WORLD. >> IF IT IS, ACTUALLY OUR MONEY IS THE LAST THING TO WORRY ABOUT. >> THANK YOU. MR. SCHACK, WOULD YOU HAVE HEARD A PLAN OTHER THAN SECRETARY PAULSON'S $700 BILLION BAILOUT? >> I WILL NOT -- I WILL NOT DO ANOTHER RANT. [LAUGHTER] HOWEVER, AS PHILOSOPHICALLY OPPOSED AS I AM TO GOVERNMENT INTERVENTION IN THE PRIVATE SECTOR TOTALLY, WE NEEDED TO DO SOMETHING TO STOP THE BLEEDING, THERE WAS TOO MUCH PANIC GOING ON. WE NEEDED TO CREATE SOME VENUE SO THAT FOLKS CAN RELAX AND JUST LET THE DUST SETTLE A LITTLE BIT AND THIS PLAN THAT THEY PUT FORWARD IS -- IS AS GOOD A PLAN AS ANY. FRANKLY NO ONE KNOWS HOW IT'S GOING TO TURN OUT. I DON'T THINK WE'RE GOING TO SPEND THE 700 BILLION FRANKLY. WHAT -- WHAT WE NEED TO DO THOUGH IS -- A LOT OF CHANGE IS OBVIOUSLY YOU KNOW ABOUT MY ATTITUDE ABOUT THE MARK TO MARKET LAW AND THE RULES, THEY HAVE -- ALONG WITH THIS PLAN, THEY HAVE THE POWER TO SUSPEND THE MARK TO MARKET RULES AND REPLACE IT WITH SOME KIND OF DISCOUNTED CASH FLOW VALUE, SOMETHING OF THAT SORT LIKE WE USED TO HAVE IN THE OLD DAYS WHEN I WAS IN YOUR SEAT. AND/OR IT'S A LITTLE RADICAL [INAUDIBLE] IF YOU WANT -- THE BANKS FAIL BECAUSE PEOPLE PULL THEIR MONEY OUT AND, YOU KNOW, THE INDYMAC WAS A RUN ON THE BANK. BASICALLY PEOPLE CAME OUT OF AND THERE'S A POLITICAL SIDE OF THIS BUT THERE WAS A CERTAIN SENATOR THAT WROTE A LETTER TO THE NEW YORK TIMES SAYING INDYMAC WAS GOING TO FAIL. WELL, WHAT WOULD YOU DO AS AN INVESTOR OR DEPOSITOR AT INDYMAC YOU GO UP IN THE MORNING AND YOU PULL YOUR MONEY OUT AND THAT'S EXACTLY WHAT HAPPENED. THE FED WAS ALREADY IN THERE GETTING READY TO MARRY INDYMAC OFF TO SOMEBODY ELSE AND THEY HAD TO SEIZE THE BANK THAT CAUSED LOSSES OF DEPOSITS AND STUFF. SO -- SO THAT'S WHAT CREATES BANK FAILURE, PEOPLE LOSE CONFIDENCE AND THEY HEAD FOR THE EXIT. THE ALTERNATIVE TO THE MARK TO MARKET THING IS KIND OF RADICAL IS TO JUST ENSURE ALL BANK DEPOSITS TOMORROW. YOU KNOW THEN EVERYONE WILL SAY WELL, YEAH BUT THAT'S GOING TO COST US, YOU KNOW, EVERYTHING WE EVER HAD. IT WON'T BECAUSE YOU'LL RELAX, I'LL RELAX AND THEN WE CAN WORK OUT ALL THE NONSENSE ON THE ASSET SIDE OF THE BALANCE SHEET WHETHER YOU USE MARK TO MARKET OR NOT. FRANKLY, IRELAND DID IT. I THINK THE EU IS CONSIDERING IT RIGHT NOW, SO THAT'S AN ALTERNATIVE TO THIS AND I THINK THEY'VE GOT THAT IN THEIR -- THAT ARROW IN THEIR QUIVER AS A POSSIBILITY AND SOME OTHER LITTLE THINGS TOO BUT THE ONE THING THAT LISA TOUCHED ON AND TIM DID, THEN I'LL STOP, IS THAT COMPARED TO 1929 WHEN THE FED STEPPED BACK, DIDN'T DO A THING, THE MONEY SUPPLY DECREASED BY 30 PERCENT IT'S LIKE, I MEAN, IT WAS EXACTLY THE OPPOSITE REACTION THAT SHOULD HAVE BEEN TAKEN. THEY RAISED TAXES AND DECREASED THE MONEY SUPPLY 30 PERCENT THAT IS NOT THIS -- THIS GROUP OF PEOPLE THAT IS IN -- THAT'S KIND OF RUNNING THIS BAILOUT NOW. IT'S EXACTLY THE OPPOSITE, THEY'RE MAKING SURE WE HAVE PLENTY OF LIQUIDITY, GOING TO TRY TO RIGHT SIZE THE MARKET, GET US CONFIDENT AGAIN SO WE ALL WILL START PUTTING MONEY BACK IN GRADUALLY AND DO THE SMART THINGS THE RIGHT WAY. SO I -- I -- I THINK IF YOU SORT OF STEP BACK FROM THE PRESS OF THIS RIGHT NOW AND -- AND -- AND JUST -- AND THEN ONE OTHER THING IS AS A STUDENT REALLY GET INTO THIS BECAUSE WHETHER YOU'RE A SERIOUS BUSINESS STUDENT OR NOT, THIS IS A HISTORIC DEAL. LISTEN TO BLOOMBERG, READ WALL STREET JOURNAL, READ THE ECONOMIST AND REALLY KIND OF TRY TO UNDERSTAND HOW IS IT WORKING BECAUSE IT WILL HELP PUT THINGS IN PERSPECTIVE FOR YOU AS YOU GET OLDER AND ALL OF A SUDDEN YOU FIND YOURSELF MY AGE AND JUST BEGINNING TO PUT THE PIECES TOGETHER, SO THAT'S ALL. >> VERY GOOD. DR. GROBAR, OUR WE IN OR HEADED FOR A RECESSION? WILL IT BE SHALLOW, DEEP, REGIONAL, NATIONAL, GLOBAL? AND WHAT IS THE ECONOMIC OUTLOOK FOR SOUTHERN CALIFORNIA FOR THE NEXT YEAR? >> OKAY. I THINK THE ANSWER TO THE FIRST QUESTION IS YES. I THINK WE ARE ACTUALLY IN A RECESSION RIGHT NOW. I THINK THAT RECESSION IS GOING TO LAST FOR THE NEXT SIX MONTHS BUT HAVING SAID THIS I SHOULD MENTION THAT THIS OPINION OF MINE IS REALLY A FORECAST AND THE REASON FOR THAT IS THAT AS ECONOMISTS WE GENERALLY ONLY KNOW THAT WE'VE BEEN IN A RECESSION AFTER THE FACT. SOME OF THE KEY ECONOMIC STATISTICS THAT WE USE TO GAUGE WHETHER THE ECONOMY IS IN RECESSION ARE ONLY RELEASED WITH A LAG. SO, WE DON'T KNOW FOR SURE BUT I CAN TELL YOU SOME OF THE INDICATORS THAT ECONOMISTS WILL LOOK AT TO TRY TO MAKE THIS ASSESSMENT, ONE OF THEM THE RAPID RUN UP OF THE UNEMPLOYMENT RATE TO 6.1 PERCENT, THE BIG DROP IN EMPLOYMENT PAYROLLS THAT OCCURRED IN THE MONTH OF SEPTEMBER, THE SEVERE SOFTENING IN CONSUMPTION SPENDING IN THE THIRD QUARTER, THE CONTINUED DETERIORATION OF THE HOUSING MARKET AND THEN FINALLY, YOU KNOW, THE ONE AREA THAT'S BEEN THE BRIGHT SPOT IN OUR ECONOMY HAS BEEN THE EXPORT SECTOR BECAUSE OF THE WEAK DOLLAR BUT WE'RE STARTING TO SEE OUR EXPORTS WEAKENING NOW TOO AND IT'S BECAUSE SO MANY OF OUR TRADING PARTNERS ARE STARTING TO HAVE BIG ECONOMIC PROBLEMS OF THEIR OWN. SO I THINK, MY VIEW IS THAT WE ARE IN A RECESSION. HOW DEEP OR SHALLOW WILL IT BE: IN MY VIEW I THINK THAT THE RECESSION IS GOING TO BE DEEPER THEN THE LAST TWO RECESSIONS SO THAT'S KIND OF BAD NEWS. THE RECESSION OF 2001 AND THE RECESSION BEGINNING 1990 WERE BOTH ACTUALLY VERY MILD RECESSIONS BY HISTORICAL STANDARDS. I THINK THIS TIME AROUND WE'RE LOOKING AT SOMETHING VERY SIMILAR TO THE SEVERITY OF THE '81, '82 RECESSION THAT WAS A RECESSION WHERE THE UNEMPLOYMENT RATE NATIONALLY REACHED ABOUT SEVEN AND A HALF PERCENT. TO PUT THAT IN PERSPECTIVE, THOUGH, DURING THE GREAT DEPRESSION UNEMPLOYMENT EXCEEDED 25 PERCENT, SO WE'RE TALKING ABOUT A RECESSION THAT IS DEFINITELY GOING TO BE SEVERE BY RECENT STANDARDS BUT BY HISTORICAL STANDARDS NOWHERE NEAR WHAT WE EXPERIENCED IN THE 1930'S. OKAY. WELL, WHAT ABOUT SOUTHERN CALIFORNIA: WE REALLY GENERALLY CAN NEVER AVOID THESE OVERALL MACROECONOMIC TRENDS SO GENERALLY, IF THE U.S. GOES INTO RECESSION, OUR ECONOMY HERE WILL GO INTO RECESSION TO SOME EXTENT, ALTHOUGH, THE RECESSION MAY BE MORE OR LESS SEVERE THEN THE NATIONAL ONE. YOU KNOW, IF YOU LOOK AT SOUTHERN CALIFORNIA RIGHT NOW, IT'S REALLY QUITE INTERESTING BECAUSE WE'RE SEEING SOME DIFFERENT ECONOMIC TRENDS GOING ON IN DIFFERENT PART OF THE REGION. BASICALLY WHAT WE'RE SEEING IS THAT THE COUNTIES THAT WERE REALLY BENEFITTED THE MOST FROM THE HOUSING BOOM ARE THE ONES THAT ARE CURRENTLY HARDEST HIT. SO IF YOU LOOK AT, FOR EXAMPLE, COUNTIES LIKE ORANGE COUNTY WHERE THERE HAVE BEEN TREMENDOUS LOSSES IN FINANCIAL EMPLOYMENT, RIVERSIDE, SAN BERNARDINO, WHERE THE CONSTRUCTION ACTIVITY OVER THE LAST TEN YEARS HAS BEEN SO HIGH AND NOW HAS DROPPED TO ZERO, THESE ARE THE COUNTIES REALLY BEING HURT IN THE CURRENT ECONOMIC CRISIS. INTERESTINGLY, LOS ANGELES COUNTY WHICH REALLY HAD DIFFICULTIES IN THE 1990 RECESSION AND IS BY FAR THE BIGGEST ECONOMY IN SOUTHERN CALIFORNIA WITH FOUR MILLION OUT OF THE REGION'S SEVEN MILLION JOBS LA COUNTY IS DOING PRETTY WELL, YOU KNOW. WE'RE SEEING SOME VERY MILD JOB LOSSES IN LOS ANGELES COUNTY. OVER THE LAST 12 MONTHS WE'VE LOST LESS THAN A HALF OF A PERCENTAGE POINT OF OUR EMPLOYMENT BASE. BY CONTRAST THE JOB LOSSES IN ORANGE COUNTY, RIVERSIDE, SAN BERNARDINO HAVE BEEN ABOUT TWO PERCENT OVER THE LAST YEAR, JOB LOSSES IN VENTURA COUNTY THREE PERCENT. SO, I THINK IT'S GOING TO BE A REGIONAL RECESSION THAT IS GOING TO BE GEOGRAPHICALLY UNEVEN WITH SOME AREAS DECLINING MORE THAN OTHERS BUT I THINK THE GENERAL TIMEFRAME OF THE RECESSION WILL BE VERY SIMILAR TO THE NATIONAL ONE. I THINK WE'RE GOING TO SEE THE LARGEST ACTUAL DECLINE IN THE ECONOMIC ACTIVITY OCCUR OVER THE NEXT THREE MONTHS WITH THE RECOVERY BEGINNING IN MID-2009. >> THANK YOU. DEAN SOLT'S NEXT QUESTION IS RATHER OF INTEREST TO PEOPLE WHO WORK HERE. ON TUESDAY CALIFORNIA'S SENATOR FLOREZ PROPOSED ASKING OUR PUBLIC RETIREMENT SYSTEMS, CALPERS AND CALSTRS TO PURCHASE THE STATE'S DEBT IN ORDER TO HELP SOLVE THE STATE'S LIQUIDITY PROBLEM INCLUDING PAYING STATE EMPLOYEE PAYROLL AND FUNDING SCHOOLS, WHAT WOULD BE THE IMPACT OF THIS PROPOSAL WERE IT IMPLEMENTED? >> WELL, FIRST OF ALL, I DON'T THINK I WOULD RECOMMEND THIS. I THINK [LAUGHTER] I HAVE REASONS THOUGH. IT'S MY MONEY [LAUGHTER]. I THINK IT'S A VERY WELL-INTENTIONED IDEA. CALIFORNIA IS IN A TOUGH SITUATION I'M NOT SURE WHETHER IT'S A LIQUIDITY CRISIS OR A SOLVENCY CRISIS. OKAY. BUT IN THE SHORT TERM, CALIFORNIA NEEDS SEVEN BILLION DOLLARS TO PAY ITS BILLS AND GOVERNOR SCHWARZENEGGER HAD ASKED THE TREASURY IF PERHAPS IT COULD GET A LOAN FROM THE U.S. TREASURY THAT MIGHT BE A BETTER PLACE, THE FEDERAL TREASURY, I MEAN THOSE ARE THE LENDERS OF LAST RESORT IF YOU WILL. MASSACHUSETTS HAD FLOATED THE SAME IDEA A WEEK OR SO AGO BUT TODAY'S HEADLINES SAYS MASSACHUSETTS WAS ABLE TO GO TO THE PRIVATE MARKET AND BORROW THE FUNDS IT NEEDS FROM NONGOVERNMENT SOURCES. NOW, GETTING BACK TO CALPERS AND CALSTRS THOSE ARE RETIREMENT SYSTEMS THAT MEANS THAT SOME OF MY SALARY EVERY MONTH IS DONATED TO CALPERS, PRESIDENT ALEXANDER, PROVOST GOULDEN ARE NICE ENOUGH TO PAY THE DOWER, OR NICE ENOUGH TO CONTRIBUTE SOME FROM THE UNIVERSITY BUT CALSTRS HAS A FIDUCIARY RESPONSIBILITY TO ME TO INVEST THOSE ASSETS FOR THE LONG-TERM SO THAT WHEN I RETIRE, I WILL BE ABLE TO HAVE A PENSION PLAN, I MEAN, THAT'S A PART OF THE BENEFIT. SO THE ASSETS ARE THE CONTRIBUTIONS THAT I'M MAKING AND THE UNIVERSITY IS MAKING BUT THE LIABILITIES ARE VERY, VERY LONG-TERM. I PLAN TO BE HERE FOR QUITE A WHILE YET AND THERE -- SOME OF THE PEOPLE THAT JOIN THIS WILL PROBABLY BE HERE 30 OR 40 YEARS, SOME OF MY COLLEAGUES HAVE BEEN 40 YEARS SO THESE ARE VERY LONG-TERM LIABILITIES THAT CALPERS HAS WITH THE UNIVERSITIES AND STRS HAS WITH OTHER PARTS OF OUR EDUCATIONAL SYSTEM, SO THE GOAL OF THE PLAN I WOULD SAY FOR CALPERS AND CALSTRS IS TO INVEST LONG-TERM TO MEET THEIR PENSION LIABILITY. CALSTRS SPOKESMAN SAID WELL, YOU KNOW, THAT'S AN INTERESTING PROPOSAL AND, IF THERE IS SOME ECONOMIC MERIT TO US THAT WE COULD ALLOCATE SOME OF OUR PORTFOLIO TO IT, MAYBE WE WOULD. WE WOULD NEED A PROPOSAL FROM THE STATE. I JUST DON'T THINK THIS ONE IS GOING TO FLY. >> THANK YOU. AND WE HAVE ONE MORE QUESTION AND THEN WE WILL OPEN IT UP TO QUESTIONS FROM THE AUDIENCE, SO BE THINKING ABOUT WHAT YOU WOULD LIKE TO ASK. AND THIS LAST QUESTION IS OF GREAT INTEREST. PRESIDENT ALEXANDER, HOW WILL THE CURRENT ECONOMIC SITUATION AFFECT THE CSU NEXT YEAR AND INTO THE FUTURE? >> WELL, A NUMBER OF WAYS AND WE'VE BEEN GOING THROUGH THIS FOR QUITE SOME TIME. I MENTIONED REVENUES THAT BEING PROBABLY THE MOST IMPORTANT ISSUE THAT WE'RE DEALING WITH. THE GOOD NEWS IS THAT OUR ENDOWMENT LOST A LOT LESS MONEY THAN STAMFORD'S ENDOWMENT THIS YEAR. [LAUGHTER] THERE ARE ADVANTAGES TO HAVING A MUCH LOWER ENDOWMENT ACTUALLY. OTHER THINGS THAT I THINK HAVE PARTICULARLY RELEVANT -- PARTICULAR RELEVANCE TO OUR STUDENTS I THINK NATIONWIDE YOU'RE GOING TO SEE A CONTINUED PRESSURE ON FEES AND TUITION AND AS STATES DO NOT FUND WIDER ACCESS BUT WANT WIDER ACCESS FOR THE ECONOMIC REASONS OF HIGHER LEVELS OF HUMAN CAPITAL ATTAIN -- EDUCATIONAL ATTAINMENT THE BURDEN HAS CERTAINLY SHIFT -- THE BURDEN OF TAXATION HAS SHIFTED AND IT'S SHIFTING ON THE BACKS OF STUDENTS. THE FORTUNATE NATURE OF CALIFORNIA IS WE'RE STILL FIGHTING THE GOOD FIGHT IN TERMS OF FEES AND TUITION. WE'RE ONE OF THE LOWEST, IN FACT, OUR UNIVERSITY, THERE ARE ONLY FIVE OTHERS IN THE UNITED STATES OF 4,000 THAT CHARGE LESS THAN WE DO. WE'RE FIGHTING THE GOOD FIGHT. WE NEED MORE PEOPLE TO REALIZE THE INVESTMENT VALUE OF WHAT WE'RE HOPING TO ACCOMPLISH AND WHAT WE DO ACCOMPLISH EACH AND EVERY YEAR. THE STATE WE'RE IN THIS, IN OUR EARLIER DISCUSSIONS OF CSU, WE'RE LOOKING AT REALLY ABOUT A TWO YEAR RECOVERY OUT OF THIS, SIX MONTHS WAS QUITE OPTIMISTIC UNTIL WE START SEEING REVENUE PATTERNS START GENERATING. WHAT WE LOSE IN ALL THIS IS AS ENERGY COSTS GO UP, AS HEALTH CARE COSTS GO UP, AS SALARY ISSUES IMPACT OUR FACULTY AND STAFF VERY LITTLE DISCUSSION YOU HEAR IN THE LEGISLATIVE HALLS IN SACRAMENTO WITH REGARD TO INVESTMENT IN EDUCATION. IN FACT, I'VE BEEN QUITE DISAPPOINTED IN THE DEBATES AND THE CAMPAIGN TRAIL DURING THE LAST YEAR AND A HALF THAT ONE OF THE BIG CHALLENGES OF THIS IS THAT EDUCATION IS BECOME A BACKSEAT ISSUE -- BACKSEAT ISSUE OF SIGNIFICANCE, BEHIND AFGHANISTAN, BEHIND IRAQ, BEHIND HEALTHCARE, BEHIND SOCIAL SECURITY, BEHIND MEDICAID AND NOW BEHIND WALL STREET AND WE FIND VERY LITTLE ATTENTION TO THE THING THAT IS PERHAPS THE MOST FOUNDATIONAL ISSUE THAT WE DEAL WITH AS A SOCIETY AND 70 PERCENT OF EVERY STATE'S INVESTMENT -- 70 PERCENT OF EVERY STATE DOLLAR, STATE NATIONWIDE, GOES INTO EDUCATION BECAUSE IT IS SUCH A GOOD INVESTMENT THAT MAKES US VERY SUSCEPTIBLE TO THESE TURNS, IT MAKES US VERY SUSCEPTIBLE TO THESE ISSUES. THE GOOD NEWS IS THE FEDERAL LOAN SYSTEM THAT MANY OF OUR STUDENTS ARE CONTINGENT UPON TO GET THROUGH COLLEGE, TWO YEARS AGO THE -- THE WE WERE ABLE TO WORK A BILL THROUGH CONGRESS THAT PULLED $20 BILLION OUT OF THE BANKS THAT WAS NOTHING BUT PROFIT OVER THE NEXT FOUR YEARS. THE RECONCILIATION ACT WENT THROUGH TWO YEARS AGO. WHAT THAT DOES IS ESSENTIALLY DROPS DOWN, CAPS THE LOAN AMOUNT THAT, IF YOU'RE USING FEDERAL DIRECT STUDENT AID LOANS WHICH I HIGHLY ENCOURAGE BEFORE YOU EVER DROPOUT BECAUSE OF THE -- BECAUSE A PART-TIME JOB MAY SEEM MORE ATTRACTIVE AT THE TIME, TAKE ADVANTAGE OF THE FEDERAL DIRECT STUDENT AID LOAN PROGRAM. THOSE RATES WILL DROP TO THREE AND A HALF PERCENT BY THE YEAR 2012 AND ARE CONTINUALLY GOING DOWN. THEY HAVE INCOME CONTINGENT REPAYMENT PROGRAM THAT ARE ALSO EMBEDDED WITHIN THIS SYSTEM AND THOSE DOLLARS THAT ARE AVAILABLE FOR YOU TO GET THROUGH COLLEGE ARE THERE AND THEY'RE PROTECTED. THEY'RE NOT GOING TO FLUCTUATE WITH THE CREDIT MARKETS. THEY'RE NOT GOING TO FLUCTUATE WITH WHAT A BANK DECIDES TO DO BECAUSE THEY WANT HIGHER INTEREST RATES. NOW, IF YOU'RE RELYING ON PRIVATE LOANS TO GET THROUGH, I ENCOURAGE YOU TO BAIL OUT OF THE PRIVATE LOANS BECAUSE THOSE RATES CAN CHANGE ON YOU ON AN ANNUAL BASIS, THESE WILL NOT. THEY'RE PROTECTED BY THE DEPARTMENT OF EDUCATION AND WE'VE GOT ANOTHER BACKUP SYSTEM IN THE DEPARTMENT OF EDUCATION WHICH IS DIRECT LENDING WHICH OVER HALF OF AMERICAN HIGHER EDUCATION INSTITUTIONS ALREADY HAVE ADOPTED TO EVEN GET THE LENDERS, THE PRIVATE LENDERS, OUT OF THE MIDDLE OF THE DIRECT LOAN INDUSTRY WHICH IS WORTH $50 BILLION A YEAR. THESE STUDENTS NEED -- OUR STUDENTS NEED THIS TYPE OF ASSISTANCE, THESE ARE GOOD INVESTMENTS VERSUS BAD INVESTMENTS AND THERE IS A DEFINITE DIFFERENCE BETWEEN CREDIT CARD DEBT AND THEN STUDENT LOAN DEBT BECAUSE YOU'RE INVESTING IN YOURSELF, AND AS I POINTED OUT TO YOU EARLIER THAT'S STILL BRINGING YOU 12 TO 14 PERCENT RETURN RATE EVERY YEAR FOR THE REST OF YOUR LIFE. KNOW THE DIFFERENCE, WORK WITH THE UNIVERSITY WHETHER YOU'RE ON OUR CAMPUS OR OTHER CAMPUSES, MAKE SURE THAT YOU'RE UTILIZING WHAT'S AVAILABLE TO YOU. STUDENTS ARE IN A RELATIVELY PROTECTED ZONE HERE, THOSE THAT ARE MOVING ON INTO THE CAREER MARKET WHO ARE GRADUATING, I ENCOURAGE YOU TO KNOW YOUR FIELD WELL. OUR ENGINEERS THERE'S MORE JOBS THAN YOU NEED OUT THERE, OUR NURSES THERE ARE MORE JOBS THAN YOU NEED OUT THERE, OTHERS THAT ARE HEARING FROM OTHER GRADUATES THAT THE MARKETS ARE TIGHTENING AND THE UNEMPLOYMENT HAS HIT THOSE AREAS AND YOU'RE DECIDING ON WHETHER TO GO TO GRAD SCHOOL OR TO GO INTO FULL-TIME EMPLOYMENT, IT MIGHT BE A GOOD TIME TO CONSIDER GRAD SCHOOL A LITTLE MORE SERIOUSLY UNTIL YOU CAN WAIT THIS OUT FOR ONE OR TWO MORE YEARS. IT'S A GOOD -- BECAUSE THE RESOURCES ARE AVAILABLE FOR YOU TO GO TO GRAD SCHOOL, AND IT'S A GOOD TIME TO WAIT OUT A BAD ECONOMY BECAUSE THE INCOMES ARE COMING DOWN IN MANY FIELDS WHILE OTHERS ARE STILL IN SUCH HIGH DEMAND THAT THOSE JOBS ARE STILL THERE. KNOW YOUR FIELD, TALK TO YOUR PROFESSORS, TALK TO YOUR FACULTY ABOUT WHAT'S GOING ON IN THE MARKETPLACE, ARE THE GRADUATES THAT WENT BEFORE ME GETTING GOOD JOBS OR ARE THEY COMING BACK TO GRAD SCHOOL BECAUSE THAT MAY BE A GOOD INDICATION WHETHER YOU SHOULD GO ONTO GRAD SCHOOL OR NOT RIGHT AWAY. >> THANK YOU. [INAUDIBLE] AND NOW FOR ONE OF THE MOST INTERESTING PARTS OF OUR PROGRAM, THE QUESTIONS FROM YOU. WE SHOULD HAVE A COUPLE OF PEOPLE WANDERING AROUND, WE HAVE THEM WITH MICROPHONES AND I WANT TO SAY THAT WE'RE PARTICULARLY INTERESTED IN HEARING THOUGHTFUL QUESTIONS FROM BUSINESS STUDENTS WOULD BE OF PARTICULAR INTEREST -- WE'VE GOT ONE RIGHT HERE, SHEILA, IF YOU CAN GET TO HER. >> [INAUDIBLE] I UNDERSTAND THAT THE TOP FIGURE ON THE BAILOUT FROM THE SAVINGS AND LOANS SCANDAL UNDER CHARLES KEATING MANY YEARS AGO WAS $200 BILLION THAT FIGURE RAISES THE QUESTION AND THAT ACTUALLY IS THE QUESTION BUT WHAT KIND OF SAFEGUARDS WOULD YOU LIKE TO SEE PUT IN PLACE IN THE FUTURE TO STOP THE KINDS OF THINGS WE SEE HAPPENING GOING BACK BEFORE THAT AND ACTUALLY, OBVIOUSLY, SINCE? >> WHO'D LIKE TO TAKE THAT -- >> -- KEN? >> I'M NOT SURE I COULD REALLY WEIGH IN ON THAT ONE. >> I APOLOGIZE THE -- AS I -- I HAD A LITTLE HARD TIME HEARING IT BUT EVERYBODY -- ARE YOU TALKING ABOUT THE GREED THAT WAS PART OF THIS WHOLE THING? THERE IS PLENTY OF GREED TO GO AROUND, IT STARTED WITH THE BORROWERS WHO IN MANY CASES KNEW THEY WERE TAKING OUT LOANS THAT WERE WAY OVER THEIR HEAD WHEN THE INTEREST RATES INCREASED. THEY KNEW THEY DIDN'T HAVE THE DOWN PAYMENT, QUITE OFTEN THEY KNEW THAT THEY DIDN'T HAVE A JOB BUT THEY WERE TELLING PEOPLE THEY DID, SO THERE'S A CERTAIN ELEMENT IN THE SUBPRIME MESS OF THIS GREED ON THE BORROWERS PART. THE MORTGAGE BROKERS KNEW WHAT THEY WERE DOING AND THEY WERE GENERATING THESE LOANS, THEY HAD NO SKIN IN THE GAME, THEY WERE JUST PACKAGED UP, MAKE THE LOAN, HAND IT OFF TO AN INVESTMENT BANK IN SOME SORT AND -- OR TO THEIR COMPANY WHO WOULD PACKAGED THEM UP WITH 1,000 OTHERS AND SELL IT TO WALL STREET, AND THEY'D GO OUT AND MIX AND MATCH THESE THINGS AND GET AN S&P RATING OR ONE OF THE OTHER RATINGS THAT SAID THIS WAS, YOU KNOW, THIS WAS AN A RATED SECURITY AND SO EVERYBODY, YOU KNOW, THE INVESTORS DIDN'T DO THEIR HOMEWORK, THEY WERE LAZY AND -- AND SEARCHING FOR YOU LIKE CRAZY SO THEY WERE GREEDY. SO, HOW DO YOU LEGISLATE AGAINST GREED; FORGET ABOUT IT. WHAT YOU DO, HOWEVER, IS YOU -- WE NEED TO UNSCRAMBLE THIS REGULATORY SYSTEM. THERE WAS A GREAT ARTICLE IN THE NEW YORK TIMES SUNDAY THAT HAD WHAT LOOKED LIKE A RUBIK'S CUBE AND THEY WERE TRYING TO SAY WHO ALL THE REGULATORS WERE AND I CAN TELL YOU FROM FIRSTHAND EXPERIENCE THAT'S A FACT. WE NEED TO UNSCRAMBLE THAT. GET ONE GROUP IN THERE THAT KNOWS WHAT THEY'RE DOING. WE JUST HAD AN FDIC EXAM, I CAN TELL YOU WE PASSED WITH FLYING COLORS, IT WAS FABULOUS, THESE WERE GOOD PEOPLE, THEY UNDERSTOOD THEIR STUFF AND -- BUT THEY'RE ALWAYS GOING TO BE BEHIND THE CURVE FROM FINANCIAL INNOVATION. SO IF -- CAN YOU EVER -- WE TRIED WITH SARBANES-OXLEY TO GET RID OF CORPORATE GREED AND ACCOUNTING SHENANIGANS AND ALL THAT KIND OF THING THAT'S A BUST. IT SURE DIDN'T PROTECT US FROM THIS THING. SO, WHAT WE NEED TO DO IS NOT ABANDON THE CAPITAL SYSTEM, IT IS THE MESSIEST SYSTEM ON EARTH, IT IS, BUT IN TERMS OF LONG-TERM PERSONAL GROWTH AND HAPPINESS PARTICULARLY WITH THE AMERICAN CULTURE IT'S MUCH BETTER THAN A CENTRALIZED PLANNING THING. CENTRALIZED FINANCIAL PLANNING IS VERY NEAT AND TIDY, YOU CAN GET THINGS DONE IN NO TIME BUT THERE'S NO INCENTIVE THERE, THERE'S NO REAL LIFE THERE. SO, IT'S A TERRIBLE ANSWER BUT -- SO BUT WE NEED TO GET BACK TO BASICS WHICH EVERYBODY IS GOING TO DO IN SPADES NOW, AND WE NEED TO HAVE ADEQUATE OVERSIGHT AS THIS THING BEGINS TO DEVOLVE AGAIN. WALL STREET AS WE KNEW IT IS GONE, THE LAST TWO BIG INVESTMENT BANKS ARE NOW COMMERCIAL BANKS. THE HEDGE FUNDS WILL PROBABLY TAKE THEIR PLACE IN TERMS OF FINANCIAL INNOVATION BUT THEY'RE PRIVATELY OWNED, AND SO IT'S ALREADY EVOLVING BACK TO SOMETHING THAT WE KIND OF UNDERSTAND. AFTER THIS BAILOUT DOES WHATEVER IT'S SUPPOSED TO DO AND I PREDICT IT IS GOING TO -- ONCE THE BIDS START HAPPENING FOR THESE ASSETS THAT NO ONE IS BIDDING FOR, THERE'S TREMENDOUS AMOUNT OF LIQUIDITY THAT'S SITTING ON THE SIDELINES. YOU AND I WILL START PULLING MONEY OUT OF OUR MATTRESS, FIGURATIVELY, AND I THINK THIS COULD TAKE KIND OF A RAPID -- RAPIDLY LIQUIFY SOME OF THESE ASSETS AND THEN WE'RE GOING TO BE FACING AN OLD FASHIONED RECESSION WHICH I THINK IS [INAUDIBLE] IT DOESN'T REALLY ANSWER YOUR QUESTION BUT IT'S THE BEST I CAN DO. >> OKAY. WELL, LOTS OF PEOPLE ON THEIR WAY IN BUT WE'VE GOT LOTS MORE QUESTIONS AND QUICKLY. >> TWO PARTS FOR SAFEGUARDS -- IS THIS ON? >> YEAH. >> WHAT A LOT OF US TALKED ABOUT IS AT THE TIME THE LOANS ORIGINATED, THE MORTGAGE BROKERS GET A FEE SO THEY HAVE AN INCENTIVE TO WRITE EVERY CONTRACT THAT THEY CAN. THE LENDING STANDARDS WERE SUCH THERE WERE THINGS CALLED NO INCOME VERIFICATION LOANS. YOU SAY YOU HAVE INCOME, THEY WRITE IT DOWN, YOU GET A LOAN. SO TIGHTEN THE LENDING STANDARDS THERE AND THEN, AFTER THE LOANS WERE PACKAGED AND SOLD OFF, THERE NEEDS -- IT'S INTO AN UNREGULATED MARKET FOR A FINANCIAL DERIVATIVES. BANKS ARE REGULATED, FIRMS ARE REGULATED, THEY HAVE TO FOLLOW SARBANES-OXLEY, SO MORE REGULATION ON THE DERIVATIVES MARKETS, MORE REGULATION ON LENDING STANDARDS, MORE REGULATION ON THE DERIVATIVES MARKETS. >> OKAY. WE'VE GOT ONE RIGHT HERE. >> HELLO. MY NAME IS HILLY BRANDT [PHONETIC]. I AM A GRADUATE STUDENT IN THE ECONOMICS DEPARTMENT HERE AT CAL STATE LONG BEACH. I KNOW DR. GROBAR VERY WELL. MY QUESTION, WE TALKED ABOUT THE LIQUIDITY CRISIS AND WE'VE ALSO TALKED ABOUT STUDENT LOANS AND HOW NECESSARY THEY ARE. PRESIDENT ALEXANDER YOU MENTIONED FOR THOSE PEOPLE WHO HAVE PRIVATE LOANS MAYBE THEY SHOULD, YOU KNOW, GET OUT OF THOSE AND GO INTO PUBLIC LOANS. I HAVE A NUMBER OF FRIENDS IN LAW SCHOOL WHO ARE ABSOLUTELY -- THEY RELY ON PRIVATE LOANS ESPECIALLY. FIRST OF ALL, BECAUSE OF THE LIQUIDITY PROBLEM, IS THE MONEY NECESSARILY GOING TO BE THERE FOR THESE STUDENT LOANS AND ALSO FOR THE PEOPLE WHO CAN'T GET OUT OF THEM, IS THERE GOING TO BE SOME SORT OF PROBLEM THAT THEY NEED TO WORRY ABOUT. >> THEY'RE IN GREATER JEOPARDY WITHIN THE PRIVATE LOAN BECAUSE MANY OF THE SAME BANKS THAT THEY'RE GETTING PRIVATE LOANS ARE GETTING OUT OF THE BUSINESS BECAUSE OF THE 20 BILLION THAT WAS TAKEN OUT IN THE RECONCILIATION ACT. IT'S NOT AS LUCRATIVE FOR BANKS AND SAVINGS -- LENDERS TO BE IN THE STUDENT LOAN MARKET ANYMORE, SO IT WOULDN'T SURPRISE ME TO SEE MANY MORE OF THESE BANKS FOLD AND MOVE OUT. NOW, RECENT LEGISLATION PROTECTED SOME OF THOSE. I THINK THE ISSUES STUDENTS REALLY NEED TO CAREFULLY WEIGH, WHERE THEY'RE GOING TO LAW SCHOOL, WHAT TYPES OF COSTS THEY'RE INCURRING. MANY INSTITUTIONS WILL TELL YOU UPFRONT THEY WILL TELL YOU THAT DON'T WORRY, IT'LL BE WORTH IT IF YOU COME HERE. PAY WHAT WE ASK YOU TO PAY. AND WE'VE BEEN TRYING TO MAKE THESE -- THESE TYPE OF STUDENT LOAN ISSUES TRANSPARENT AND GETTING UNIVERSITIES TO REPORT THEM ALL OVER THE UNITED STATES OF WHICH WE REPORT OURS ON OUR HOMEPAGE; WHAT THE AVERAGE UNDERGRADUATE GRADUATES WITH AND WHAT PERCENTAGE OF OUR STUDENT BODY. WE ACTUALLY HAVE PUSHED TO GET IT LEGISLATED AT THE FEDERAL GOVERNMENT LEVEL. NOW, A LOT OF IT IS CHOICE TOO, CHOICE TO GO INTO SIGNIFICANT DEBT BECAUSE I SUSPECT, IF THEY ARE RELYING VERY HEAVILY ON PRIVATE LOANS TO GET THEM THROUGH LAW SCHOOL, THAT THEY'RE GOING TO VERY EXPENSIVE PLACES; IS THAT RIGHT? >> YEAH [INAUDIBLE] >> YEAH. DON'T BUY AT THE STICKER PRICES, HIGHER EDUCATION HAS NOT BEEN TRANSPARENT, INSTITUTIONS HAVE BEEN MANIPULATING THEIR PRICING ON STUDENTS FOR THE LAST 25 YEARS AND STUDENTS HAVE BEEN SUCKERED INTO MANY INSTITUTIONS BECAUSE THEY HAVE BEEN LED TO BELIEVE BECAUSE THEY CHARGE A LOT THEY MUST BE GOOD. THIS IS THE CHIVAS REGAL AFFECT OF HIGHER EDUCATION. THE BOTTLE LOOKS GOOD BUT IT TASTES THE SAME ON THE INSIDE. THEIR EARNINGS CAPACITY, PAY CLOSE ATTENTION, WE'RE PUSHING TO GET EARNINGS CAPACITY, I SUSPECT THAT THE EARNINGS CAPACITY OF A GRADUATE OF A HIGH COST INSTITUTION, ALLEN KRUEGER'S WORK AT PRINCETON AND OTHERS ARE POINTING OUT THAT THE EARNINGS CAPACITY OF A STUDENT WHO GRADUATES FROM LOW COST INSTITUTION IS VERY LITTLE DIFFERENT -- VERY LITTLE DIFFERENCE THEN THOSE THAT ARE GETTING SUCKERED INTO PAYING A FORTUNE TO GET HIGH COST INSTITUTION GRADUATE DEGREES AND OTHER THINGS. PAY CLOSE ATTENTION TO THE MARKET, PAY CLOSE ATTENTION TO THE DETAILS AND THE ECONOMIC DATA THAT IS COMING OUT AND FIND OUT FROM GRADUATES WAS IT WORTH IT WHEN THEY'RE PAYING BACK $100 THOUSAND WORTH OF DEBT AND THEN THEY SO CHOOSE TO FIND A SPOUSE THAT WENT TO THAT INSTITUTION WHO'S ALSO $100,000 IN DEBT. [LAUGHTER] >> OKAY. ANOTHER QUESTION, WE'VE GOT ONE BACK HERE. >> I CAN TALK. >> OKAY. >> YES, ACTUALLY I UNDERSTAND WHY WE ARE SO ANGRY BECAUSE I HAVE THE SAME FRUSTRATION AND I ASSUME THAT WE ARE SOME OF THE MORE INTELLIGENT PEOPLE AND, IF WE DON'T UNDERSTAND WHAT'S GOING ON, I UNDERSTAND WHY THE AVERAGE PERSON DOESN'T UNDERSTAND WHAT'S GOING ON. I HAVE A COUPLE OF QUESTIONS AND MAYBE THE PANEL CAN ANSWER ME. NUMBER ONE, IF WE PAID OUT $700 BILLION TO THIS BANK, WAS IT JUST BECAUSE WE WANTED TO MAKE A CREDIT MARKET -- [INAUDIBLE] SO WHAT HAPPENED, THEY GOT THE MONEY, THEY WANT TO HAVE THE BAILOUT AND THEN THEY DON'T WANT TO, YOU KNOW, TO LOAN THEIR MONEY AGAIN? SO BASICALLY WHAT WE DID WE JUST PAID OFF THEIR OWN BAD DEBT AND NOT, YOU KNOW, THEY DID NOT PUT THE MONEY BACK INTO THE MARKET. >> OKAY. >> AND TWO, LET ME ALSO ASK MY SECOND QUESTION AND THEN YOU CAN ANSWER, IF WE ARE GOING TO PAY $700 BILLION DOLLARS WOULD IT NOT MAKE MORE, YOU KNOW, SENSE IF YOU PAID THEM A LITTLE BIT JUST TO MAKE SURE THAT THEY HAVE ENOUGH, YOU KNOW, SO THEY CAN GO ON FOR A FEW MONTHS AND CLEAN UP THEIR ACT AND PUT THE REST OF THE MONEY BACK INTO WHERE IT'S REALLY -- THE AVERAGE PERSON, YOU KNOW, CAN BENEFIT FROM IT LIKE EDUCATION LIKE RENEWABLE ENERGY AND ALL THOSE OF THOSE ACTIVITIES. >> THANK YOU. DR. GROBAR, I THINK YOU WANTED TO GO -- >> YEAH, WELL I THINK I CAN ADDRESS SOME OF IT, THIS TROUBLED ASSETS RELIEF PROGRAM AS IT HAS BEEN DESIGNED IS REALLY DESIGNED TO GET SOME OF THESE ASSETS OFF THE BOOKS OF FINANCIAL INSTITUTIONS. AND YOU ARE RIGHT IN THE SENSE THAT THERE'S NO GUARANTEE THAT THESE FINANCIAL INSTITUTIONS ARE GOING TO LEND BUT IT IS FELT THAT THAT'S GOING TO BE REALLY IMPORTANT STEP IN, YOU KNOW, RESTORING NORMALCY TO FINANCIAL MARKETS AND REDUCING SORT OF THIS SUSPICION THAT THIS FINANCIAL INSTITUTIONS HAVE OF EACH OTHER'S BALANCE SHEETS. I SHOULD ALSO MENTION THAT THE COST OF THIS PROGRAM IS GOING TO BE DEFINITELY WELL BELOW THE $800 BILLION THAT'S MENTIONED. BASICALLY WHAT THEY'RE DOING IS THEY'RE GOING TO HOLD ONTO THESE ASSETS MANY OF WHICH ARE ACTUALLY PERFORMING MUCH BETTER THAN PEOPLE ANTICIPATE AND, ONCE SORT OF THE DUST CLEARS IN THIS MARKET AND PEOPLE REALIZE THAT, THESE ASSETS ARE GOING TO GO UP IN VALUE, THE TREASURY IS GOING TO BE ABLE TO RESELL THEM AT A HIGHER PRICE. THE ULTIMATE COST TO TAXPAYERS IS REALLY UNKNOWN BUT I THINK THERE IS AN OPTIMISTIC SCENARIO THAT THIS COULD END UP COSTING TAXPAYERS VERY LITTLE. ON THE ONE HAND THE TREASURY CAN BORROW FOR, AS YOU MENTION, ALMOST NOTHING THESE DAYS; IT'S NOT COSTING US TO RAISE FUNDS THROUGH THE TREASURY. IF WE END UP BUYING ASSETS THAT THEN GO UP IN VALUE, IT DOESN'T COST US VERY MUCH TO HOLD THEM, THE NET COST TO THE TAXPAYER MAY BE LOW BUT, OF COURSE, IT IS A RISK AND THERE ARE NO GUARANTEES. I WILL TELL YOU THAT THIS PROGRAM HAS A COUPLE OF NEAR PRECEDENTS, THE RESOLUTION TRUST CORPORATION OF THE EARLY 1990'S AND ALSO THE HOMEOWNER'S LOAN CORPORATION OF THE 1930'S WERE SIMILAR TYPES OF PROGRAMS. THE RESOLUTION TRUST CORPORATION DID COST TAXPAYERS IT'S ESTIMATED ABOUT $125 BILLION BUT THAT WAS LESS THAN THE 400 BILLION THAT WAS SPENT ON THE PROGRAM AND THE PROGRAM IN THE 1930'S WAS LIQUIDATED IN 1951 WITH A NET PROFIT RETURNED $14 MILLION BACK TO THE TREASURY. SO, WE DON'T KNOW, YOU KNOW, WHAT THE NET COST WILL BE BUT I AM CONFIDENT THAT IT WILL BE A LOT LESS THEN THE $800 BILLION. >> THANK YOU. WE HAVE A QUESTION RIGHT HERE. >> [INAUDIBLE] OKAY. WITH THE -- DURING THE GREAT DEPRESSION YOU SAID THE MONEY SUPPLY WAS -- IT WAS LIKE DECREASED. RIGHT NOW IT SEEMS -- KIND OF SEEMS LIKE THE OPPOSITE AND IT SEEMS LIKE WITH THE FED LIKE -- LIKE PUTTING IN ALL THIS LIQUIDITY AND ALSO WITH LIKE THE BAILOUT ADDING LIKE $700 BILLION INTO LIKE INTO THIS SYSTEM ALREADY AND THEN ALSO WITH ALL THE COUNTRIES LIKE [INAUDIBLE] THE DOLLAR DON'T YOU SEE LIKE A POSSIBLE LIKE HYPERINFLATIONARY DEPRESSION KIND OF [INAUDIBLE] >> MIKE? >> WELL, WE'RE ALL KENSIANS NOW. [LAUGHTER] SERIOUSLY KENSIAN THEORY CAME OUT AND SHOWED THAT THE GOVERNMENT DONE THE WRONG THING EXACTLY AND BILL FRIEDMAN SORT OF GOT FAMOUS WITH HIS WIFE FOR WRITING A BOOK ABOUT THE GREAT MISTAKES OF THE GREAT DEPRESSION. THE FEDERAL RESERVE CHAIRMAN, BEN BERNANKE, SAYS THAT RIGHT NOW BECAUSE OF FALLING COMMODITY PRICES, FALLING OIL PRICES THAT THE RISK OF INFLATIONARY PRESSURES ARE -- ARE NOT GREAT SO THIS IS A GOOD TIME -- A GOOD POINT IN TIME TO BE ABLE TO SPEND THIS MONEY. BUT I THINK WHAT LISA SAID REALLY RESONATES TRUE, THIS IS LIKE AN INVESTMENT OF $700 BILLION AND THAT MONEY WILL BE TAKEN OUT WHENEVER THOSE ASSETS ARE SOLD, SO I DON'T THINK IT'S GOING TO BE INFLATIONARY. >> JUST -- >> SURE. >> WELL, FIRST THE $800 BILLION IS COMING FROM THE TREASURY SO THAT HAS NO IMPLICATION FOR THE MONEY SUPPLY, IT'S MONEY THAT'S GOING TO BE PROBABLY BORROWED FOR THE U.S. PUBLIC. WHAT DOES HAVE POTENTIAL INFLATIONARY IMPACT ARE THE ACTIONS OF THE FED BECAUSE BASICALLY THE FED IS CREATING MONEY AND USING IT TO BUY UP, FOR EXAMPLE, ASSETS IN THE COMMERCIAL PAPER MARKET AND THINGS LIKE THAT. THERE IS A -- I -- I WOULD ADMIT THERE IS A DEFINITE POTENTIAL FOR HIGH INFLATION TO BE THE RESULT OF THESE ACTIONS AND OCCUR IN THE FUTURE. IT'S NOT GOING TO OCCUR IN THE NEAR TERM, THERE'S TOO MUCH DEFLATIONARY PRESSURE BUT THE FED HAS A LOT OF INSTRUMENTS TO PRETTY MUCH FINELY TUNE THIS LIQUIDITY, IF THEY'RE SMART AND I BELIEVE THEY'RE VERY SMART, WHAT THEY'RE GOING TO DO IS, WHEN THE ECONOMY STARTS TO RETURN BACK TO NORMAL, THEY'RE GOING TO TAKE THAT LIQUIDITY BACK OUT OF THE SYSTEM AND DO IT FAIRLY RAPIDLY AND, IF THEY ACHIEVE THAT RESULT, WE CAN AVOID A HIGH RATE OF INFLATION RESULTING FROM THIS PERIOD BUT I THINK IT IS A RISK. >> THANK YOU. QUESTION RIGHT HERE. >> HI, MY NAME IS ALLISON CLARK. I'M AN ENVIRONMENTAL SCIENCE AND POLICY MAJOR, AND I'M REALLY CONFUSED WITH THE TERM COMMERCIAL PAPER MARKET AND REALLY UNSURE ABOUT THE INCENTIVE FOR THE FEDERAL GOVERNMENT GETTING IN ON THIS. >> WHO WANTS TO TAKE THAT ONE? >> I CAN START IT. COMMERCIAL PAPER IS BASICALLY SHORT-TERM DEBT OBLIGATIONS THAT CAN BE TRADED, SO THEY'RE AN ASSET, AND THE REASON THE GOVERNMENT IS GETTING INTO THIS PARTICULAR SITUATION, AT LEAST FROM OUR PERSPECTIVE, IS AND WE'VE ALLUDED TO THIS A COUPLE OF TIMES THROUGHOUT THE DISCUSSION THEY CAN HOLD THESE ASSETS WHERE THEY'RE ACTUALLY COLLECTING ABOUT 90 PERCENT OF THE MONEY THAT THEY EXPECTED TO COLLECT WHEN THEY PURCHASED THE SECURITY BUT THEY'RE NOT SUBJECT TO THE ACCOUNTING RULES THAT'S REALLY THE BASIC THING IS THAT GIVES THIS THING A CHANCE TO WORK THAT'S THE BASIC FACTOR THAT GIVES THIS THING A CHANCE TO WORK. THEY CAN BUY ASSETS PRESUMABLY AT A DISCOUNT AND I CONCUR THAT THEY'RE PROBABLY NOT GOING TO SPEND THE WHOLE AMOUNT ALLOCATED TO IT BECAUSE YOU'RE NOT GOING TO PAY BOOK VALUE OR PAR VALUE TO THESE THINGS. THEY'RE GOING TO BUY THEM AT A DISCOUNT, BUT THEY'RE WORTH A LOT MORE, SO THAT'S A SHORT ANSWER. ANYBODY ELSE WANT TO? >> YEAH. GOING BACK TO WHAT REALLY THE DEFINITION OF COMMERCIAL PAPER, THE OLD DAYS 1980 [LAUGHTER] YOU KNOW, COMPANIES USED TO GO TO BANKS TO BORROW, THEY WERE THE LENDERS. AND THEN THROUGH FINANCIAL INNOVATION AND A LOT OF COMPETITION IN THE GLOBAL ECONOMY KIND OF [INAUDIBLE] START UP COMPANIES FOUND THEMSELVES WITH DEPOSITS OR A LOT OF CASH AND THEY WERE HAVING -- THEY WOULD DEPOSIT THE CASH IN THE BANK AND THE BANK WOULD TAKE IT AND LEND IT TO SOMEBODY ELSE AND THEY'D MAKE THE PROFIT. SO WHAT HAPPENS IS THAT SOME SMART FOLKS OUT THERE SAID WELL, I'LL JUST ARRANGE TO -- FOR BERKSHIRE HATHAWAY TO TAKE -- I'LL ARRANGE FOR YOU, BERKSHIRE HATHAWAY, TO LOAN YOU MONEY TO WHATEVER THEY NEED FOR OVERNIGHT MONEY AT GE, SO THAT COMPLETELY CUT THE BANKS OUT OF THE DEAL AND THAT'S HOW COMMERCIAL PAPER -- THAT'S A FUNCTION OF COMMERCIAL PAPER. IT'S ONE DAY TO 270 DAYS, TECHNICALLY, VERY SHORT-TERM IN NATURE TYPICALLY IT RUNS ONE TO 14 DAYS SO BASICALLY IT'S, IF YOU'RE RUNNING A BUSINESS YOU HAVE TO MAKE PAYROLL FRIDAY YOU KNOW YOU HAVE A RECEIVABLE COMING IN NEXT WEEK, YOU'LL BORROW THIS WEEK, MAKE YOUR PAYROLL AND THEN PAY THE BORROWINGS BACK. YOU DO THAT WITH COMMERCIAL PAPER, YOU JUST PAY BERKSHIRE HATHAWAY BACK INSTEAD OF THE BANK. NOW, WHY ARE THEY BUYING THIS? BECAUSE COMPANIES WEREN'T LOANING ANY MONEY TO EACH OTHER AT ALL, THE MAGNITUDE OF THE COMMERCIAL PAPER MARKET WAS LARGER THAN THE COMMERCIAL BANKS WOULD BE ABLE TO STEP IN AND TAKE AND SO THIS ACTUALLY FREES UP THEN THE MONEY FLOWING ON A DAY-TO-DAY BASIS BETWEEN THE COMPANIES THAT'S HOW TIGHT THIS GOT AND, IF YOU CAN'T MAKE PAYROLL AS A COMPANY, YOU'RE OUT OF BUSINESS AND SO THAT, I HOPE THAT KIND OF SIMPLIFIES THAT A LITTLE BIT. >> WE HAVE A QUESTION BACK THERE. >> I GOT A COUPLE OF QUESTIONS HERE, ONE IS KIND OF BASIC, IN ECONOMICS THERE HAS BEEN A GREAT DEAL OF CONTROVERSIES OVER THE EFFECTIVENESS OF MONEY -- MONEY -- MONEY SAFE POLICY AND SOME HAVE SUGGESTED THE [INAUDIBLE] THAT THE FEDERAL RESERVE SHOULD PAD THE RATE OF GROWTH IN MONEY SUPPLY AT THE RATE OF GROWTH OF PRODUCTIVITY IN THE COUNTRY. NOW, AT THIS TIME BY ALLOWING THE DEPARTMENT OF TREASURY TO HANDLE THE BAILOUT PLAN, HAVEN'T WE REALLY CREATED ANOTHER GOVERNMENT BUREAUCRATS, ANOTHER AGENCY THAT COMPETES WITH THE FEDERAL RESERVE BANK? NOW, I FEEL LIKE WE HAVE TWO MONETARY POLICY INSTITUTIONS, ONE IS FEDERAL RESERVE AND THE OTHER ONE IS DEPARTMENT OF TREASURY AND I LIKE TO KNOW FROM THE PANELISTS HERE TO SEE IF THIS IS THE DIRECTION THAT THIS COUNTRY IS GOING, THAT'S NUMBER ONE. NUMBER TWO, WHY DOES THE GOVERNMENT HAVE TO COME IN WITH $700 BILLION? FIRST OF ALL THIS COUNTRY HAS 350 MILLION PEOPLE, EACH ONE OF US COULD HAVE RECEIVED $20,000 EXTRA MONEY AND WITH THE $20,000 WE COULD HAVE DONE A WHOLE BUNCH OF OTHER THINGS. IN FACT, GOVERNMENT ALL THE GOVERNMENT HAD TO DO WAS COME UP WITH A GUARANTEE TO [INAUDIBLE] THEREBY INCREASING THE LIQUIDITY. IN OTHER WORDS, THE REASON WHY THE THIS PAPERS NOT BEING LEGAL IS BECAUSE THESE PAPERS WERE PERCEIVED AS VERY RISKY PAPER, NOBODY WANTED TO BUY, WHY WOULD THE GOVERNMENT COME UP WITH -- >> THIS IS A QUESTION NOT A SPEAKING -- >> -- MUCH CHEAPER. >> -- SO IF SOMEONE WOULD TAKE THAT QUICKLY BECAUSE WE'RE RUNNING OUT OF TIME, LISA? >> I'LL TAKE PART ONE. A COUPLE THINGS, FIRST JUST TO EMPHASIZE AGAIN THESE ACTIONS BY THE TREASURY, THE BAILOUT PLAN, WILL HAVE NO IMPLICATION FOR THE MONEY SUPPLY BECAUSE THE TREASURY CANNOT CREATE MONEY, THE ONLY ENTITY THAT CAN CREATE MONEY IS THE FEDERAL RESERVE. THE TREASURY WILL IMPLEMENT THE BAILOUT PLAN THROUGH BORROWING AND THAT HAS NO IMPLICATION FOR THE MONEY SUPPLY. ON THE FIRST PART OF THE FIRST QUESTION, THE EFFECTIVENESS OF THE MONETARY POLICY, THERE HAS BEEN A RAGING DEBATE WITHIN MACROECONOMICS ABOUT THE ROLE OF THE FED, THE APPROPRIATE ROLE OF THE FED, AND ON ONE SIDE OF THE DEBATE HAVE BEEN ECONOMISTS WHO HAVE SAID THE FED SHOULD TAKE A VERY NONINTERVENTIONIST PASSIVE APPROACH AND INCREASE THE MONEY SUPPLY AT A STEADY RATE AND THAT'S THE BEST -- THAT'S GOING TO GIVE US THE BEST OUTCOME IN TERMS OF ECONOMIC STABILITY. ON THE OTHER SIDE HAVE BEEN THE MORE, I GUESS YOU MIGHT SAY KENSIAN OR ACTIVIST APPROACH. WE'RE CLEARLY SEEING A KENSIAN, ACTIVIST, APPROACH TO MONETARY POLICY. IN MY OPINION I THINK IT'S ABSOLUTELY THE RIGHT APPROACH. I THINK, IF WE WERE TO MAINTAIN -- TRY TO MAINTAIN A STABLE MONEY SUPPLY, WE WOULD END UP WITH A HUGE RECESSION AND DEFLATION WHICH IS NOT THE OBJECTIVE OF THE FED. THE OBJECTIVE OF THE FED IS TO KEEP THE PRICE LEVEL STABLE. >> THANK YOU. WE'LL TAKE ONE MORE QUICK QUESTION AND THEN WE WILL -- >> I'M PROFESSOR [INAUDIBLE] ELECTRICAL ENGINEER BUT I WILL DARE TALK ECONOMICS FOR A LITTLE WHILE. >> BRIEFLY PLEASE. >> SURE, VERY BRIEF. I THINK CORE OF THE PROBLEM IS THAT THE BUSINESSES AND THE BANKS ARE NOT REALISTIC IN DEALING WITH THE ACTUAL NUMBERS AND THE ACTUAL CAPABILITIES OF THE PEOPLE BECAUSE ON MOST EXTREMES THE ONES WHO WANT TO BUY HOMES ARE OVER REPRESENTED SOMETIMES IN TERMS OF THEIR CAPABILITIES, IN FACT, THEY ARE NOT ABLE TO BUY HOMES BUT THEY PRESENT FAKE INFORMATION SO THAT THEY QUALIFY. ON THE OTHER HAND THERE IS -- >> CAN YOU GET TO THE QUESTION, PLEASE. >> YES, I AM GOING TO GET TO THAT. THE OTHER SIDE OF THE STORY IS THAT THE BOOK VALUE OF SOME OF THE HOUSES IS ZERO WHEN, IN FACT, IT HAS A REAL VALUE SO THERE IS A MISREPRESENTATION ON BOTH EXTREMES. MY POINT IS THAT WHOLE THE CRISIS INDICATES THAT THE 100 PERCENT CAPITALISM DOESN'T WORK. YOU HAVE TO HAVE SOME KIND OF GOVERNMENT INTERVENTION SO THAT THIS THING GETS REGULATED. THANK YOU VERY MUCH. [LAUGHTER] >> THAT SOUNDED LIKE A SPEECH. >> WELL, I'M LOOKING FOR COMMENTS BY THE HONORABLE COMMITTEE FOR WHAT I PROPOSE, A GOVERNMENT INTERVENTION. >> DOES ANYONE WANT TO RESPOND TO THAT AS IF IT WERE A QUESTION? >> I THINK I TALKED ABOUT [INAUDIBLE] >> LET'S TAKE ONE MORE QUESTION. THIS GENTLEMAN HAD HIS HAND UP PATIENTLY, WE'LL TAKE HIS AS THE LAST QUESTION. >> HI, GOOD AFTERNOON. I'M JASON [INAUDIBLE] I'M A GRAD STUDENT IN HEALTHCARE ADMINISTRATION. MY QUESTION, YOU KNOW, WE TALK ABOUT KEEPING CAPITAL INVESTMENT BUT YOU ALSO DISCUSSED THE DECREASING EMPLOYMENT AS WELL AS EMPLOYMENT PAYROLL, HOW WILL THIS TREND ESSENTIALLY EFFECT THE JOB MARKET ASIDE FOR THE NEED FOR RNS AND ENGINEERS AS YOU MENTIONED IN THE SHORT AND LONG-TERM? >> IS THAT THE -- >> I'LL TAKE IT. >> LISA. >> YOU KNOW, THE NEAR TERM OUTLOOK FOR THE JOB MARKET IS DEFINITELY DOWN. THERE ARE CERTAIN BRIGHT SECTORS OF THE ECONOMY, YOU MENTIONED HEALTHCARE AND THAT IS ONE OF THE FEW SECTORS THAT I THINK IS GOING TO CONTINUE TO ADD JOBS IN THE NEAR TERM BUT, YOU KNOW, RECESSIONS ARE SHORT-TERM EVENTS AND I THINK AS STUDENTS, I MEAN, THE BEST THING -- ADVICE I CAN GIVE IS YOU'RE PLANNING A CAREER FOR YOUR LIFETIME NOT THE NEXT TWO OR THREE YEARS. YOU WANT A JOB THAT'S GOING TO STIMULATE AND EXCITE YOU AND TO GET INTO SOMETHING THAT YOU ARE GOING TO FIND FULFILLING FOR A LIFETIME, SO I WOULD NOT BE TOO DISCOURAGED BY THE NEAR-TERM, YOU KNOW, UPS AND DOWNS OF THE ECONOMY. IF YOU WANT TO BECOME A NURSE, HEY, GREAT AND IT'S -- JUST ABOUT ANYTIME IS A GREAT TIME TO BECOME A NURSE BUT, IF YOU HAVE YOUR SIGHTS SET ON ANOTHER CAREER, I WOULD ENCOURAGE YOU TO PURSUE THOSE INTERESTS AND ALSO, YOU KNOW, GRADUATE SCHOOL IS, YOU KNOW, IF THE OPPORTUNITY COSTS IS LOW OF YOUR TIME MEANING YOU MIGHT BE UNEMPLOYED, IT'S NOT A BAD OUTCOME. I, MYSELF, WENT TO GRADUATE SCHOOL, I WAS CLASS OF 1982, BIG RECESSION. >> I'M A REAL LIFE EXAMPLE OF WHAT HAPPENS WHEN YOU GRADUATE INTO A RECESSION THAT'S WHY I WENT TO GRAD SCHOOL. [LAUGHTER] SO THINGS WERE SO DARK THEN AND I'LL TELL YOU SOMETHING THIS IS THE BEST DEAL IN TOWN, SPEND WHAT YOU SPEND TO GET THIS EDUCATION [INAUDIBLE] BECAUSE THERE IS NO INVESTMENT YOU'RE GOING TO MAKE IN YOUR WHOLE LIFETIME THAT'S GOING TO BE AS GOOD AS THIS ONE. SO, IF YOU FIND YOURSELF LOOKING INTO A JOB MARKET THAT'S KIND OF TOUGH, GO TO GRAD SCHOOL, THE PRICE IS RIGHT, THREE AND A HALF PERCENT YOU'RE BORROWING ON TREASURY RATES FOR CRYING OUT LOUD. SO JUST GO FOR IT BECAUSE AND STUDY THIS WHOLE RECESSION THIS WHOLE THING THAT'S GOING ON RIGHT NOW BECAUSE YOU'LL BENEFIT FROM IT DOWN THE ROAD AS AN INVESTOR OR AS A BUSINESS PERSON OR WHATEVER. >> JOIN ME IN THANKING OUR EXCELLENT -- [ APPLAUSE ]