Financial Crisis
By Kelly McGaw
News Editor
Our country is currently experiencing the “very sloppy, very messy” unraveling of one of the greatest financial bubbles in recent history, said William Gruver, distinguished clinical professor of management and executive-in-residence, in a panel discussion last week.
Gruver was one of three panelists discussing our nation’s deepening financial crisis Thursday in a jam-packed Langone Center Forum.
Greg Krohn, associate professor of economics, and Scott Meinke, associate professor of political science joined Gruver on the panel, moderated by Christopher Zappe, dean of arts and sciences.
Gruver said Americans and Wall Street are culpable for the current state of the economy.
He said our culture is one of instant gratification: The average American owns 3.5 credit cards, each with an average balance of $12,000. Therefore, the average American owes $40,000 at double-digit interest rates, Gruver said.
“We want it now, we want more than ever before, and we don’t want to work long for it,” he said.
In the past few decades Wall Street has increasingly utilized the financial concept of leverage: using borrowed funds or debt in order to increase returns to equity.
Leverage magnifies potential returns and losses to investors. If the investment becomes worthless, loans and interest still need to be paid back and the loss becomes much greater than it would be if the investment had not been leveraged, according to investopedia.com.
In the decades between the early 1970s and early 1990s, the global investment firm Goldman Sachs had a leverage ratio of 10:1. For every $1, the firm controlled $10 worth of assets and borrowed $9, said Gruver, a general partner at the company at the time.
“That kept me up at night, that level of leverage. I was nervous all the time,” Gruver said.
Two decades later, Lehman Brothers, a global investment bank, has a 33:1 leverage ratio. Bear Stearns, another investment firm, has a 30:1 ratio, Gruver said.
“For those of you that might have missed the last few months, those firms are no longer with us,” he said.
In 2001 the nation responded to the tech-stock bubble’s bursting and the economic threat of Sept. 11, focusing on the residential real-estate market.
Over-inflation of the market fueled its decline in 2006, Gruver said.
Banks and other investors with a stake in the real estate market suffered when defaults on sub-prime mortgages began to increase, Krohn said. (read more)
