Brought to you by WBIW News and Network Indiana
Last updated on Wednesday, October 1, 2008
(UNDATED) - With all the turmoil on Wall Street and the overall financial sector, the question becomes, what does this really mean for you and me here in South Central Indiana? WBIW News spoke with Professor Jeff Fisher at the IU Kelley School of business about the meaning, the cause, and the way out of this mess.
"Everybody's worrying about it," Fisher says.
"We want our banks to be safe and deposits to be safe although they're insured up to a certain amount. But you want a banking system that has the capital to loan money out, and we don't want to have banks failing, and...we want to keep our retirement accounts safe."
So how did we get here in the first place?
Fisher says, "Now you can say Wall Street caused the problem, that, I mean, Wall Street was maybe one of the players that caused the problem, but you had mortgage brokers and lenders and rating agencies and other businesses that caused the problem."
Fisher continued, "At this point, it probably doesn't really matter what caused the problem. The question is what can we do to solve the problem going forward?"
So then, what can be done do fix the overall problem?
"I'm beginning to think a combination, actually, of what has been proposed by both sides mixed in. You have to have some purchases of securities because, right now, the banks need the liquidity, they need the capital," Fishers explains.
"Without transactions, you aren't really freeing up the capital, and without transaction, you don't really know what these [securities] are worth, and without knowing what they're worth, you wouldn't know what to charge for insurance on them, which is the other proposal, providing insurance on losses on the securities.
"I think, probably, some combination of the two, where the government starts to purchase some of these and, so long as they purchase them at the right price, and help the market recover, then, actually, the government could make money on this."
One concern about the current financial crisis is less over what things are worth, with Wall Street on a rollercoaster ride, but who owns what. JP Morgan Chase, Bank of America and Citigroup now own most of America's deposits and investments. Professor Fisher tells us what the ramifications of this could be.
"From everything I've heard, they're still pretty strong," Fisher starts. "That doesn't mean we can step back and say 'we're okay now,' there's still a lot of other banks around the country, regional banks, which we don't want to get into trouble.
"You still want to make sure these larger banks are still able to loan to each other, so, if they're all looking at each other thinking, 'Okay, we think you're okay, but we're not sure,' they don't loan to each other. That creates a real problem."
There's also a concern over what the crunch is having on smaller regional and local banks like, for instance, Stone City, Monroe Bank, and Bloomfield State Bank.
"I was talking to somebody, I won't mention names of banks, but yesterday, with a bank in the Chicago area, that, they're in good shape, but because of what's happened to interest rates, it's really hard for them to do any business."
The bailout package voted down on Monday would not have benefited smaller banks to much of any degree.
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