Economic Outlook

November 30, 2008

In early October, as world financial markets rose and fell with each new piece of news about a potential bailout bill working its way through the U.S. Congress, President Richard H. Brodhead convened a campus-wide President's Forum on Critical Issues focused on the economy.

The forum featured a panel discussion that drew on the expertise of Duke faculty members in law, business, economics, and political science. It was aimed at students and other Duke community members interested in learning more about the situation's causes, potential solutions, and likely effects on the November elections.

Panel member James Cox, Brainerd Currie Professor of law, reviewed the origins of the crisis, describing how "the Fed did nothing" as a housing bubble developed several years ago. He said failures of the Securities and Exchange Commission, the rating agencies, and others set the stage for the severe losses suffered by Lehman Brothers and other firms whose financial leverage was "pretty phenomenal."

Katherine Schipper, Thomas F. Keller Professor of accounting at the Fuqua School of Business, outlined the ways in which accounting problems contributed to the crisis, leaving investors without a clear picture of the risks they were taking. She argued against suspending fair-market accounting, saying valuations must be based on current financial realities rather than on the hopes of institutions waiting for bad loans to improve.

The situation's impact on Washington was discussed by David Rohde, Ernestine Friedl Professor of political science. He said he could not remember when the president and leaders of both parties last recommended a piece of legislation only to see it defeated, as the initial bailout bill was in the House of Representatives. He said that vote illustrated both Congressional concern about voter anger and the decline of White House influence as a lame-duck president ends his term in office.

The panel also included Craig Burnside, professor of economics, and Cam Harvey, J. Paul Sticht Professor of international business at Fuqua.