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June 2014

Experts gather at ninth annual finance conference

The Great Recession officially ended five years ago. But its effects still loom large in the world economy and the psyches of investors, executives, and policymakers. This was readily apparent at the Carroll School of Management’s ninth annual Finance Conference on June 4 and 5, where speakers and panelists discussed the lingering consequences of the global recession of 2009 on politics, investment, and monetary policy.

“We’re five years into a bull market, and there’s still not a general acceptance that we’re in a bull market,” said Richard Bernstein, CEO and CIO of Richard Bernstein Advisors. According to Bernstein, bull markets end due to excesses, like investors putting all their money into equities and companies drastically increasing inventory and leverage. “We just don’t see this happening yet,” he pointed out.

 Liz Ann Sonders, Charles I. Clough, Jr., and Richard Bernstein
Moderator Liz Ann Sonders, Charles I. Clough, Jr., and Richard Bernstein

Charles I. Clough, Jr. ’64, chairman and CEO of Clough Capital Partners, noted that banks and companies have been relatively risk-averse, keeping capital investments under control. “When you control investment, you generate cash,” he said, and the result is stranded liquidity. “You want to see that liquidity turned into credit. The credit mechanism can’t stay broken forever.” Stranded liquidity, Clough said, is a by-product of “high-powered money” from central banks, among other things.

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis and one of the day’s keynote speakers, said he believed the Fed should work to keep real interest rates “unusually low” for the next five years. With unemployment still high and inflation still low, Kocherlakota said, the Fed should be willing to accept the risk of perceived financial instability that results from businesses and investors rushing to take advantage of low interest rates. (View video of Kocherlakota's talk below.)

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While investors and bankers continue to struggle to make sense of the Great Recession’s aftermath, an even larger crisis is at hand, warned keynote speaker Erskine Bowles, former chief of staff in the Clinton White House and cochair with former senator Alan Simpson of President Obama’s National Commission on Fiscal Responsibility and Reform. That is the federal deficit, and the consequences of not taking action to prevent “the most predictable economic crisis in history.”

Erskine Bowles
Erskine Bowles

Bowles cast the problem of the federal deficit in no uncertain terms. “When [Simpson] and I said yes to the president, we thought we were doing it for our 15 grandkids,” he said. “It became clear to us we weren’t doing it for our grandkids. We weren’t even doing it for our kids. We were doing it for us.”

Bowles lamented the laggard response to the commission’s key recommendations. “We’ve done the easy stuff,” he said, like raising taxes on the wealthy and capping discretionary spending. “We’ve done the stupid stuff,” like the sequester. However, he said, “we’ve avoided like the plague the tough stuff,” like lowering health care costs, simplifying the tax code, and making social security sustainably solvent.

Addressing the deficit won’t be easy, he observed, and will require principled compromise from politicians from both parties. “We can’t just grow our way out of this problem,” Bowles said. “Raising taxes doesn’t do a thing to change the demographics of this country, or the fact that health care is growing at a faster rate than GDP.”

“It’s our generation of Americans that caused these problems, and it’s our responsibility to clean them up,” he said.