Q&A with John Gnuschke, professor of economics at University of Memphis.
A professor of economics at the University of Memphis since 1976, Dr. John Gnuschke has been the director of the Sparks Bureau of Business and Economics Research since 1985. He has twice been recognized by the U of M with the Superior Performance in University Research Award. And Dr. Gnuschke has never seen anything like the U.S. economic crisis of 2008.
In Hamlet, Polonius warned Laertes, "Neither a borrower nor a lender be." What would Polonius say about the current economic crisis in America?
It's a different time. Everybody borrows, we all lead lives that depend on credit, and financial institutions are one of our major industries. He'd say it's a different time and a different place.
Several institutions are to blame for the crisis on Wall Street. Who among them might have seen this coming in time to prevent it?
This took a number of years to catch up to us. Developers, both commercial and residential, have seen business cycles before. They know when the market is overbuilt. They know when they're building houses that the public can't afford. Until 2005, they were too busy making money to worry about the down side of taking risks. Financial institutions were the same way. They were all in the mortgage-banking business. Everyone who packaged mortgages a little differently took another slice of the pie.
Will the collapse of institutions like Lehman Brothers and the government bailout of AIG eventually help close the gap between America's "haves" and "have nots?" Or will they merely be a severe lesson in the consequences of greed?
It's some of both. Some of our regional financial institutions will pull in their wide-ranging operations and they'll become more concerned with providing banking services for a state or locality. They'll concentrate their attention on the markets they know best. Is that a good thing? I think so.
Some good things can happen as a result of [a bailout], probably foremost that it instills a sense of confidence back in the market. Someone's doing something.
Are government bailouts a dangerous precedent or a necessary extreme?
It's a necessary extreme. It slows down transactions, and gives people time to adjust and time to think about the issues that are facing us. Time to come up with reasonable solutions.
Is Memphis susceptible to market fluctuations — or protected from them — in ways other cities are not?
Our market is pretty stable. We don't have a lot of major manufacturers who are at risk, or big auto companies that might lay off tens of thousands of people. Our solid base of operations has kept us pretty protected. We're a slow, steady-growth community. Business cycles here tend to be fairly minor.
Your students will be the next generation's "masters of the universe." What seem to be their chief concerns in the current economic climate?
Food and gas. This financial meltdown has kind of put those things on the back burner [in the media]. Energy prices are going to impact every household in Memphis. My students are concerned with pocketbook issues. They don't have stocks, they're not nearing retirement, and they have many years ahead to work.
Has 2008 changed your approach to teaching economics?
I try to be optimistic about the basic strength of the American economy. And realistically, this is in fact the world's best economy. Because of the free market, because of the independence of business, frankly, from government. Which makes a bailout very ironic, but also very short-term. As soon as we recover financial stability, we'll find companies very quickly try to divorce themselves from [government] partnerships they've made. It's a shotgun wedding.
Share one money-management rule we should all take into consideration.
You need to recognize that anything can happen to you: a sickness, a job loss, some kind of interruption to your income. That can have a serious impact on your ability to pay your bills. We tend to think (1) we'll always work with our current employer and (2) we'll remain basically healthy, and always be able to work. Many of the foreclosures that took place were not the result of people not wanting to pay their bills, but people not being able to pay their bills. It's like the Boy Scouts motto: be prepared.
We're increasingly operating in a global environment, with worldwide competition. Which is why it's so important to get a college degree.