There has been a lot of talk recently about the country’s current financial condition; what caused it, how to fix it, are we really even in a recession? For many Americans, recession, at best, is a broad term that means economic times are tough.

We asked university experts to talk about, from their perspectives, what may have caused a situation that has even investment firms seeking help from the Fed. What is the recession’s impact, nationally and globally? And are there any solutions?

Albert “Pete” Kyle, professor of finance at the Robert H. Smith School of Business

Albert “Pete” Kyle, professor of finance at the Robert H. Smith School of Business, offers that one way to reverse the slump would be if “all large banks and securities firms postponed dividends for three to five years. Hold them in reserve to pay out later when dust settles.”

By doing so, he says, significant capital could be raised “to keep banking industry as a whole solvent.” Banks that didn’t have bad loans can either pay out dividends in arrears or use capital to back large loan books. Those with undisclosed bad loans, it prevents a disaster from becoming larger.

Cutting rates dramatically just “bails out bad behavior by imposing inflation tax on those who did not make bad decisions. This strategy places losses squarely on the shoulders of those who made bad decisions.”

He admits, though, that there are deeper problems to fix. “Perhaps consumers need to be taught to consume less and save more.”

Watch two short podcasts of Kyle further discussing the recession’s impact:
http://realtime.rhsmith.umd.edu/media/podcasts/topics/kyle-recession-pt2.mov
http://realtime.rhsmith.umd.edu/media/podcasts/topics/kyle-recession-pt3.mov

Here are some other thoughts:

Myriad Factors at Fault

By Peter Morici, professor of logistics, business and public policy, Smith School of Business

Peter Morici, professor of logistics, business and public policy, Smith School of Business

Unlike post-World War II recessions, the current malaise is caused by a crisis of confidence among fixed income investors, such as insurance companies and pension funds, in the integrity and solvency of the major Wall Street banks. The rapid decline in the market value of mortgage-backed bonds issued by these banks, and erosion in the balance sheets of the major banks caused by the declining value of unsold bonds on their books, represents a modern day run on the banks, which has required the Fed to lend the banks sums totaling about 4 percent of gross domestic product.

Further job losses would indicate problems in the financial sector are damaging the real economy in lasting ways that will take many months, even years, to repair. The administration, predictably, counsels calm, but apathy toward prompt movement to repair damage caused by the shut down in bank access to the fixed income market to raise funds has made credit more difficult to obtain for many sound businesses. Even as the Fed cuts interest rates and pumps up the balance sheets of banks, business loans contract and layoffs escalate throughout the economy.

Other structural problems, like the growing trade deficit with China and runaway oil prices, are further hampering prospects for employment growth. Unfortunately, the administration’s responses to these problems have been tepid and encouraged pessimism among consumers and businesses about the economic outlook. Predictably, consumers are reluctant to spend and businesses cut hiring and lay off workers adding to the prospects of an employment death spiral.

America’s Current Financial Position, from a World Perspective

By Carmen M. Reinhart, professor, School of Public Policy and National Bureau of Economic Research

Carmen M. Reinhart, professor, School of Public Policy and National Bureau of Economic Research

The United States’ current account deficit probably clocked in at about $735 billion, or 5 1/4 percent of nominal gross domestic product in 2007. But that’s not news. The cumulative current account from 2001 to 2008 will likely total about $5 trillion.

As a nation, we have been able to spend more than we sell on world markets for such a long time and in such volume because global investors have been willing to accumulate our financial obligations. That is, our current account deficit mirrors a capital account surplus.

This year, with United States expansion faltering and the Federal Reserve slashing its policy interest rate, global investors’ willingness to fund such a continuing excess of spending over sales will be tested.

Anyone who has followed developments in emerging market economies over the years knows how bad the outcome can be when global investors turn off the lending tap. Credit becomes hard to get, domestic interest rates rise and income contracts.

Considerable pressures emerge in the foreign exchange market, typically overwhelming authorities’ ability to offset. The result is a significant and sudden depreciation of the domestic currency. All those adverse adjustments coming together in short order strain the balance sheets of domestic financial institutions, potentially compounding the constriction of credit from the sudden stop of foreign lending.

Could this happen here at home? Not likely. The United States is too large a part of the global financial system and our securities too woven into markets worldwide for investors to withdraw completely. But the forces seen in sharp relief in smaller countries will be playing out in coming markets. We’ve already seen a significant depreciation in the foreign-exchange value of the dollar, and the reluctance of foreign investors to invest here is adding to the upward pressure on spreads. That we are vulnerable to such pressures is a legacy of our reliance on foreign funding over the years.