April 13, 2009

By Lori Van Ingen
Lancaster Intelligencer Journal

Most people don’t spend their waking hours thinking about the economy and how it became the mess it is.

But Lancaster Township resident William E. Whitesell does.

Whitesell, a professor emeritus of economics at Franklin & Marshall College, said two things led us into the current recession: “greed and sin.”

On April 24, Whitesell will expand on that theory in aPathways Institute for Lifelong Learning course, “Looking at the Economy in Uncertain Times,” that he’ll be teaching at Landis Homes in Lititz.

The course is the second class Whitesell has taught for Pathways, his first being “Today’s Economy.”

In the new course, Whitesell said he’ll discuss how we got into the recession and what alternatives there are to recover from it.

In doing so, he’ll draw on more than 40 years of experience in the field.

After grad school and a stint in the Army, Whitesell began teaching at F&M in 1965. He then was a full-time economist with the Federal Reserve Bank in Philadelphia for two years and a consultant there for a year before returning to F&M for five years.

Whitesell later was Pennsylvania’s secretary of banking and comptroller of the currency and consulted for the Federal Deposit Insurance Corp., the U.S. Department of Justice and the Office of Thrift Supervision. He returned to F&M to teach in 1979.

The current crisis, Whitesell said, lies at the feet of the lending institutions — both traditional commercial banks and nonbank intermediaries such as AIG and Bear Stearns.

“These institutions loaned too much money to individuals who could not afford repayment,” Whitesell said. “This significantly involved loans on real estate and, combined with credit-default swaps, set the stage for a collapse of credit markets and subsequent recession.”

While other factors were important, mortgage lending and credit default swaps were the most significant, he said.

A significant factor, he said, was the “lack of any regulations and the willingness of market participants to take inordinate risks, seemingly unconstrained by normal standards of prudence. Profits for participation in the market were for a time inordinate, and the profits lured firms to make unwise bets on the market.”

Collapse of the market, Whitesell said, was “inevitable” because of the large percentage of borrowers who had never had any credit or who were considered unqualified for prime rates of interest.

The collapse began in 2006, accelerated in 2007 and hit with full force in 2008 and later, he said.

“Some banks and nonbank financial intermediaries failed, some were plunged into extreme states of distress, holding in the aggregate trillions of dollars worth of assets of uncertain worth. Credit default swaps added to the uncertainties of some firms,” Whitesell said.

“Credit markets ceased to function smoothly if at all; home prices on average declined dramatically; bank lending contracted substantially; consumption, investment and exports all fell; and the economy spun into a severe recession with no end in sight. Only government spending grew.”

So how do we get out of the recession?

Whitesell said it’s “better for growth that the government spend $1 than give it in tax breaks” because people tend to save at least part of it.

“To my knowledge, there is no academic refereed paper or journal that argues that tax cuts are as effective in stimulating (the economy) as government spending,” Whitesell said. “There is academic research that says (government spending) is the way to do it.”

With tax cuts going to people on the bottom of the income chain, they need to spend 100 cents on the dollar. If they save even one penny, it’s not as effective as government spending, Whitesell said.

To register for the Pathways Institute for Lifelong Learning class, contact Susan J. Stauffer at Landis Homes at 381-3577.

Class size is limited to 50 people.

E-mail: lvaningen@lnpnews.com

© Lancaster Newspapers 2009