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Friday AM September 19th, 2008

image of C.T. Bauer College of Business at the University of HoustonThe Federal Reserve is pumping billions of dollars into financial markets to help ease a strained financial system. It’s to prevent further potential defaults, or inabilities to come up with money to keep investments going, according to the Dean of the C.T. Bauer College of Business at the University of Houston. Ed Mayberry reports.


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Dean Arthur Warga says rating agencies probably gave incorrect ratings to investment vehicles that are tied into each other and tied to the value of homes. 

“And all at once, when the real estate market declined, it didn’t decline by geographic region–it declined nationwide.  And we’re seeing what normally what would’ve been investment vehicles protected by diversification, and try to practice, the diversification wasn’t there the way it needed to be because it was a wholescale decline in this one source of risk–home values, commercial building values.  And unfortunately, whatever hedges or diversification were put in place that should have protected many of these investment vehicles, they weren’t there.” 

Warga says there are historical comparisons.

“The big historical comparison is probably with the savings and loan thrift crisis in the 80’s.  There was also a case where an entire industry–the banking industry, the savings and loan industry–borrowed a lot of money, short-term borrowing. They issued things called CDs and they invested them in higher-yielding instruments called long-term mortgages.  So it’s very close to what we’re seeing today.  That market also collapsed as the banks were given the ability to make riskier and riskier investments that also failed.”

Dean Warga says it’s hard to blame the government for taking some of the short-term fixes they’ve been taking, but it’s also hard to say whether those moves will solve the problems long-term.  He says the crisis is, to some extent, independent of the rest of the economy, including with production and employment.  He says fundamentally, the economy should emerge relatively healthy. 

Ed Mayberry, KUHF Houston Public Radio News.

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