Mahmoud El-Gamal says fundamental problems exist with U.S. dollar-based debt instruments. Unsustainable fiscal and trade deficits have resulted in large levels of U.S. debt, and that’s created a crisis of confidence.
“The value of a credit instrument is based primarily on the ability of the debtor to repay. Some components of these pools of mortgage-backed securities are bad. The question is how much of this pool of mortgages is bad. If people think that a larger portion is bad, then that would reduce the amount of credit that goes to the housing market, which makes it difficult for people to buy homes, which makes the prices go down, which makes some of the otherwise good mortgages become bad.”
El-Gamal says the Treasury Secretary knows those assets are worth more than the market is willing to pay for them at this time. The government’s move to buy bad debt or take ownership stake in troubled companies sends a message of confidence. The financial crisis is being discussed in various Rice economics courses this semester.
“Many of my colleagues, I know, have been quite disappointed by what they see as socialization of the U.S. financial market. The acquisitions of Fannie Mae and Freddie Mac in particular was seen as one of the biggest socialist moves in U.S. history. But you know what they say about economics–it’s, you know, we’re all free spirits, so we come from all walks of political life and we have our different views about how the economy should be run and how the political process should affect how the economy’s run.”
El-Gamal is co-writing a book with Amy Myers Jaffe of Rice University’s Baker Institute on the petrodollars and the worldwide financial system.
Ed Mayberry, KUHF Houston Public Radio News.