Summer 2009
Summer 2009
International Flavor
Trojan Territory
Chapter News
Calm voices in the midst of financial crisis
By Clif Lusk

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The community meeting room at a Troy bank was standing room only.

A small whip antenna was outside, with wires running through a window. Local radio station WTBF was carrying live a “Financial Crisis Seminar” by Troy University finance professor Robert Earl Stewart and economist Dr. Judson Edwards, director of the University’s Center for International Business and Economic Development.

The first seminar, held in September 2008 and followed by another in April 2009, helped to give those who attended a better perspective on the now international financial crisis.

“The banks did not create the financial crisis,” said Mr. Stewart, “the lowering of mortgage qualifying standards by Fannie Mae and Freddie Mac was the root cause.”

Murmurs rippled through both audiences.

Mr. Stewart, a finance faculty member for some 42 years, has seen much in the financial markets and explained the nation’s status in simple, easy to understand terminology.

“I’ve heard a lot of explanations of this mess,” said Ralph Black, a Troy broadcaster on WTBF, “but the way they covered the basis makes a lot of sense and is good information for our listeners.”

Those sentiments again were expressed in April, after the second lecture in the series was completed in Claudia Crosby Theater – this time to a largely student audience.

“We entered this crisis due to consumers spending more than they make,” said Dr. Edwards. “Now it seems that our government is following the same practice.”

Dr. Edwards summarizes his lecture with that point, adding that the Keynesian economic approaches that were used during the Great Depression don’t apply to the U.S.’s modern-day economy, which is mostly service-based.

“The U.S. government is trying to spend us out of recession, yet our workers are in the service sectors.” he said.

That stimulation, he said, would require much more spending than in a manufacturing-based economy.

“I just don’t think we can do it,” he said. “We must cut spending at all government levels in order to balance with the government’s ‘income.’”

Without cutting those government expenditures, Mr. Stewart said, interest payments on the national debt would become a “tremendous burden.”

“It is not the debt that will be a burden to our grandchildren to pay; it is the interest which is now the third-largest component in the national budget,” he said.

Citing 1990’s-era Administration changes in the national debt structure, Mr. Stewart predicted inflation would continue to worsen throughout the year.

“Shifting long-term debt to short-term debt so that the interest payments would be less caused our national debt to become interest-rate sensitive. If the rates go back up in the market, it will be harder to pay the higher amount of interest,” he said.

The Federal Reserve, Mr. Stewart explained, is buying directly issued Treasury Securities to help fund the federal deficit and keep interest rates at bay.

“This is pumping more money into the economy and the result will be inflation,” he said.

On the private-side, bank credit has seemed to loosen since last fall when the nation’s banks were hit by a capital crisis.

“The banks capital crisis in part was due to the accounting rules that required the banks to write-down the value of the mortgage-back securities they held in their investment portfolios,” Mr. Stewart said.

“The market value was down due to panic, but the securities were still producing cash flow, so that the intrinsic value of the securities was worth much more than what the banks were required to value them on their books. This caused the capital of banks to be below the amount required by regulators, causing the banks to cut back on the number of loans being approved.

“This caused the economy to shut down as the businesses depend on commercial bank short-term self-liquidating inventory loans to keep their operating cycles going,” Mr. Stewart explained.

Lusk is a university relations coordinator.

Troy University Magazine
Troy University
Alumni Affairs Office
Troy, AL 36082