Volume 15, Number 5
October 21, 2008

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The Global Financial Economic Crisis: A Bilkent Perspective

On Tuesday, October 14, Bilkent University's Economics Department held a symposium about the recent US mortgage-based crises in the financial sector and its impact on Turkey. Three Departmental professors - Assistant Professor Selin Sayek-Böke, Assistant Professor Refet Gürkaynak and Professor Erinç Yeldan - shared their ideas, experiences and solutions with a large, enthusiastic audience.

Selin Sayek-Böke spoke first, providing the main outline: Why the financial crisis occurred, and what actions the US, the EU and Turkey have taken to diminish the effects. Her presentation, "(Is) The World Changing and What About Us?" provided an overview of the mortgage crisis, what the world has done to solve the problem, and looked at the effects on Turkey. She expressed her uneasiness, feeling that with each hour's newscast: "Oh My God! The world has gone bankrupt!" She looked at the situation using a school game-Who, with Whom, and Where. The "Who" and "with Whom" are countries like the US and those in the EU, the "Where" is within the housing and credit markets, and the "real" sector. When real estate prices went down, the mortgage crisis kicked in. People stopped paying their debts to banks. Therefore, banks couldn't repay financial institutions. These institutions, which insured mortgages, were losing money. This created a liquidity and solvency problems for them. Furthermore, for a number of reasons, banks stopped lending to each other, so interest rates rose within the banking sector. These three problems combined to create a liquidity problem in the "real" sector. For Sayek, the solution is to create a combination of monetary and fiscal policy to inject money into the system. The US and the EU have injected the money, and their fiscal policy is on the way. However, Sayek is concerned about Turkey's economic policy plans, despite assurances that, "We're okay. Don't panic!"

Refet Gürkaynak examined causes of the global crisis in the financial sector, introducing the relevant financial terminology, while personifying institutions by giving them names of colleagues from his department. This led to some laughter. He talked about how a mortgage loan is originated with a house as collateral, how sub-prime (high risk) borrowers were able to get loans, and how these loans were securitized and sold to other institutions. He then talked about the derivatives written on
these mortgage-backed securities and how the default risk is transferred. When the sub-prime borrowers began to default on their mortgage loans, their lenders foreclosed on the collateral (the houses) and sold them of. The vast number of defaults led to a large number of houses on the market and the increased supply led to falling house prices. With the reduced house prices the value of the collateral no longer covered the initial loan. Lastly, he explained that the derivative contracts make it difficult to know which institutions have been hurt by the fall in real estate prices and therefore banks are hesitant to lend to each other due to the fear that their borrower might be insolvent. This chokes the inter-bank money market and causes even sound banks to suffer due to illiquidity.

erinc yeldanProf. Erinç Yeldan proposed that the ideology of neoliberal globalization and praising the market system has most likely come to an end, reflecting on past data and experiences. He backed this statement by quoting Martin Wolf's article in the “Financial Times” from March 24, 2008 that said "Remember the date March 14, 2008, because that day the global free market capitalism ideology died." He expressed concern about the “real” sector, which involves the average person on the street, rather than the financial sector. His attitude leaned towards Keynesian economics, the idea being that the state can stimulate economic growth and improve stability in the private sector through, for example, interest rates, taxation and public projects. He began his speech by reading part of "The Communist Manifesto," then pointed out that capitalism suffers from inherent systemic risks as the financial sector increasingly departs from the “real” sector and becomes larger and larger, eventually reaching the “Minsky Point” - the point in a credit or business cycle when investors have cash flow problems due to spiraling debt incurred in order to finance speculative investments. He explained his points by providing data from the "real" sector between 1950 and the 2000's. In 1950, there was a fixed exchange rate system, and Central Banks were conducted through national politics. In the 1960's and 1970's, industries were well developed, and yet profitability stagnated by the end of the 1970s. There was a push to have exchange rates governed by a flexible, capitalist system. In 1980, the Reagan-Volcker semester's tax cut took effect at the depths of the worst recession since World War II. Unemployment and inflation had hit double digits. Yeldan continued, discussing the effects on Turkey. According to him, there are two fundamental effects: One is on the financial sector as witnessed recently, which includes hot money transaction, high “real” interest rates and high currency. The second is a negative effect for producers looking to find foreign finance. The best recovery is time.

After their speeches, the panelists answered questions from Bilkenters who seemed very interested in the causes and effects of the financial crisis and the impact on the world, Turkey and themselves and put forward high quality questions.

To sum up the answers given, Turkey experienced nearly the same financial crisis in 2001, which led to the regulation of banks under a new plan. Therefore, Turkey experienced this financial crisis "softly." The banks are safe. However, why then has the Turkish Lira depreciated against the US Dollar (USD)? According to Gürkaynak and Sayek, investors fell back on the USD, which is still the reserve-money, because they don't trust currencies from "developing countries," such as Turkey and want to reduce their risk. Gürkaynak and Yeldan were in conflict over a precautionary International Monetary Fund (IMF) plan. Yeldan felt Turkey doesn't need the IMF plan because it will have the same effect as in 2001 - a low currency exchange rate and a high "real" interest rate. However, this time, Turkey isn't in a position to handle this and the "real" economic sector will most likely shrink. Gürkaynak, on the other hand, maintained that Turkey could use the IMF as an auditor to help create confidence in a new macroeconomic program. The professors believe that the next round of problems will include inflation generated by the currently injected liquidity. They all agreed that Turkey needs a well-developed economic plan.

Tuğba Zeydanlı (ECON/IV)

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