Featured Research

from universities, journals, and other organizations

Economist Says Current Financial Crisis Is First And Foremost A Crisis Of Confidence

Date:
September 26, 2008
Source:
Rice University
Summary:
The current financial crisis is first and foremost a crisis of confidence. The tip of the iceberg may be the subprime mortgage crisis and its immediate aftermath, but the roots of the crisis have to do with unsustainable dual deficits (fiscal and trade) that have resulted in gargantuan levels of US debt, both private and public.

Mahmoud El-Gamal, chair of Rice University’s economics departmentand Amy Myers Jaffe of Rice University’s Baker Institute are near completion of a forthcoming book, tentatively titled “Oil, Dollars, Debt and Crises.” The book closely examines the world financial marketplace. “It’s a book about the petrodollar and the worldwide financial system,” said El-Gamal.*

El-Gamal said, “The current financial crisis is first and foremost a crisis of confidence. The tip of the iceberg may be the subprime mortgage crisis and its immediate aftermath, but the roots of the crisis have to do with unsustainable dual deficits (fiscal and trade) that have resulted in gargantuan levels of U.S. debt, both private and public.

“Ultimately, we have to recognize that a financial system built on credit cannot survive if the issuer of that credit continues to pile up debt. For years now, we in the U.S. have been consuming beyond our means, relying on Asian and oil-exporting countries to finance our expenditures with their trade surpluses and other savings. A long-term solution to this problem can only come from careful rebalancing of global production and consumption patterns. We need to produce and save more; Asians need to consume more of our goods.

“Unfortunately, our government's approach has been to use duct tape to fix structural problems, promising to introduce proper long-term solutions after the crisis subsides. Once the immediate symptoms of the problem are addressed, however, lobbyists and high-rolling financiers make sure that the rules of the game, which favor them richly, remain the same.

“Congress is correct in putting the brakes on the current $700 billion duct-tape solution. Privatized profits and socialized losses may in the end be inevitable, given the brinksmanship of the current game. If this duct-tape fix works for a while, i.e., if the gravely ill patient becomes temporarily nonsymptomatic, we're likely to forget about the long-term debt crisis and go back to business as usual. If it doesn't, then Congress will likely be asked to provide more duct-tape financing, appealing to the ‘sunk-cost fallacy’ that we've already spent so much on the problem and we just need a bit more.

“Unfortunately, failing to provide the duct tape may in fact be as catastrophic as the Treasury Department and the Fed would have us believe. Conversely, providing the temporary fix and eventually ignoring the problem until it flares up again (with larger magnitude) may be equally disastrous. Congress seems wise to exercise double brinksmanship in trying to force the administration to accept more oversight and restrictions on executive pay, thus reducing the incentive to gamble with other people’s money,” said El-Gamal.

*El-Gamal received his bachelor’s degree in economics from American University in Cairo, his master’s degree in statistics from Stanford and his doctorate in economics from Northwestern. Prior to coming to Rice, he taught economics at the University of Rochester, Cal Tech and the University of Wisconsin-Madison. He has also worked at the International Monetary Fund and the U.S. Department of Treasury.


Story Source:

The above story is based on materials provided by Rice University. Note: Materials may be edited for content and length.


Cite This Page:

Rice University. "Economist Says Current Financial Crisis Is First And Foremost A Crisis Of Confidence." ScienceDaily. ScienceDaily, 26 September 2008. <www.sciencedaily.com/releases/2008/09/080925122353.htm>.
Rice University. (2008, September 26). Economist Says Current Financial Crisis Is First And Foremost A Crisis Of Confidence. ScienceDaily. Retrieved September 23, 2014 from www.sciencedaily.com/releases/2008/09/080925122353.htm
Rice University. "Economist Says Current Financial Crisis Is First And Foremost A Crisis Of Confidence." ScienceDaily. www.sciencedaily.com/releases/2008/09/080925122353.htm (accessed September 23, 2014).

Share This



More Science & Society News

Tuesday, September 23, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Liberia Pleads for Help to Fight Ebola

Liberia Pleads for Help to Fight Ebola

AP (Sep. 22, 2014) Liberia's finance minister is urging the international community to quickly follow through on pledges of cash to battle Ebola. Bodies are piling up in the capital Monrovia as the nation awaits more help. (Sept. 22) Video provided by AP
Powered by NewsLook.com
Hundreds of Thousands Hit NYC Streets to Protest Climate Change

Hundreds of Thousands Hit NYC Streets to Protest Climate Change

AFP (Sep. 22, 2014) Celebrities, political leaders and the masses rallied in New York and across the globe demanding urgent action on climate change, with organizers saying 600,000 people hit the streets. Duration: 01:19 Video provided by AFP
Powered by NewsLook.com
Company Copies Keys From Photos

Company Copies Keys From Photos

Newsy (Sep. 22, 2014) A new company allows customers to make copies of keys by simply uploading a couple of photos. But could it also be great for thieves? Video provided by Newsy
Powered by NewsLook.com
French FM Urges 'powerful' Response to Global Warming

French FM Urges 'powerful' Response to Global Warming

AFP (Sep. 22, 2014) French Foreign Minister Laurent Fabius on Monday warned about the potential "catastrophe" if global warming was not dealt with in a "powerful" way. Duration: 01:08 Video provided by AFP
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:

Strange & Offbeat Stories


Science & Society

Business & Industry

Education & Learning

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins