West Virginia Record

Friday, January 24, 2020

Authors believe another financial crisis is possible

By Shanice Harris | May 19, 2017

Law money 09

MORGANTOWN – Two West Virginia University professors have written a book looking at the 2008 financial crisis with perspective about ways to ensure it doesn't happen again.

Republicans argue that rolling back Wall Street regulations that were established after the 2008 crash would be best, while Democrats argue that doing so would do more harm than good.

Democrats say their proposed solution protects taxpayers and investors, and Republicans boast theirs will not stifle economic growth.

WVU professors Jena Martin and Karen Kunz, authors of “When the Levees Break: Re-visioning Regulation of the Securities Markets,” say that neither plan would work to ensure another disaster doesn’t happen. They claim the issue isn’t about a streamlined system, but that it needs to be torn down and replaced with something new. 

“The financial crisis was created by a complete failure in mortgage-backed securities. Mortgage-backed securities – unlike, say a stock – are made up of mortgages (the underlying asset) that have been bundled with other mortgages and then sliced up into groups (tranches) and these groupings were then sold to investors,” Martin and Kunz told The West Virginia Record in a joint email interview. “They are still being sold. And now they’ve also done the same thing with student loans.”

The duo also say the problem is that if mortgages continue to be sliced up this way, the mortgages become further and further removed from investors. Because of this, people have no idea what they are buying.

“The credit agencies, who were supposed to have rated the assets, trusted the people packing these products instead of looking to see that many of the (pieces of) mortgages included in the tranches were made to people who were almost sure to default,” Martin and Kunz wrote. “The retail investor – and many institutional investors, including many city governments and retirement plans – didn't understand them and never should have bought them.  The people selling them did know but they were making a lot of money so it wasn't in their interest to tell anyone.” 

This was the catalyst for the crash in 2008 and will happen again if government officials don’t pay attention to this. Legislators have been reactionary, not visionary in their thinking. They often wait until a crisis or scandal occurs to react, instead of planning in advance so that it doesn’t happen, according to Martin and Kunz. The pressure from Congress and the American people, the rushed and using of old rhetoric and complaining about the poor job the Securities Exchange Commission has done, leads to laws being passed that aren’t looking to the future to prevent.

Martin and Kunz stress that Democrats and Republicans need to come together to solve this issue. To do that, they both need to get something out of the situation. 

“For Republicans, that 'win' could be easing up on financial regulation (once corporations have gone through an initial, heavily consumer protection oriented screening),” Martin and Kunz wrote. “For Democrats, that win could be an initial consumer-oriented screening and, also holding large investors to a standard potentially equivalent to corporations.”

Currently, all investors are protected and they feel that needs to change. But it is going to be difficult under the current administration. The duo doesn’t have much hope that the Trump administration will address these problems, which could be devastating to the American people if or when another financial crisis happens. 

“We think it will be more devastating than the crash of 2008, or maybe even the Great Depression,” Martin and Kunz wrote. “We would like to think it won't happen in our lifetimes, but honestly, we wouldn't be surprised if it happened within the next decade. The only way to prepare for it is to prevent it: talk to your legislators, get involved, educate yourself on your finances and the agencies protecting them. Oh, and stock your pantry.”

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Organizations in this Story

West Virginia UniversityU.S. Securities and Exchange Commission