A prominent economist told Oswego State students that the financial crisis of 2008 should not have happened during a talk on Wednesday.
“Every day we are going to bed with the crisis and waking up with the crisis,” said Yildiray Yildrim, chairman of Syracuse University’s finance department. “Could it have been prevented? Yes.”
Yildirim, who spoke to a crowd of about 40 students for two hours Wednesday night, pointed to the pricing of credit default swaps as a key failure that led to the financial crisis.
Credit default swaps are similar to an insurance policy on the default of mortgage-backed securities. Yildirim, whose Ph.D is from Cornell University, and a partner analyzed the value of credit default swaps in the middle of last decade and found most to be mispriced. The price failed to reflect an accurate amount of risk that consumers purchasing exotic mortgages would fail to make their payments, he said.
The European debt crisis was also discussed and Yildirim expressed doubts that it had been handled correctly, especially when it came to toxic Greek debt.
“They should let Greece default,” Yildrim said. “From a financial point of view, I would just pull out of the European Union and default.”
He said that strategy might allow Greece to take a monetary timeout by returning to the Drachma, getting its house in order and then reapplying for EU membership years down the road.
Yildirim singled out ratings agencies for their errors leading to the financial crisis. He said the ratings are often too political to be of value.
“I never believe in the ratings agencies,” Yildirim said. “If we need to regulate someone, it should be them.”
However, on the subject of the Standard and Poors’ credit downgrade of the U.S., Yilirim agreed with the agency.
“I think it should have been done a long time sooner,” he said. “It would have been done a lot sooner if they were doing their due diligence.”
Yildirim said that by failing to deal with tasks that were important, but not urgent, the financial market improperly managed risk, leaving it vulnerable to the collapse in 2008. He added that he was not optimistic about the future.
“We don’t really look good domestically,” Yildirim said. “After January, I expect to see some inflation in the market.”
The economist also discussed the success of the Turkish economy, explaining some highlights, and he took questions from the audience ranging from securitization markets to commodities and the exchange rate.