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Brenau business professor says to hold on to stocks for now

POSTED: October 14, 2008 5:00 a.m.

Although the stock market may not have hit bottom, it will eventually rebound, said Suzanne Erickson, the chairwoman of business administration for Brenau University.

"The fundamentals of most companies are strong, and the prices are just being driven down by fear," Erickson said. "And fear will go away."

Erickson, a finance professor, spent more than an hour discussing the factors that led up to the country’s current financial situation and the implications of the "market meltdown" to a small group of Brenau faculty, staff and students Thursday evening.

Erickson strongly advised those listening not to sell their stock shares.

"If you sell, you’ve realized your loss and you’ve locked it in and now you truly have lost money," Erickson said. "So hang on and just don’t sell."

Erickson, who said she would normally take the laissez-faire stance of letting the market correct itself, said the government’s $700 billion bailout plan could ease the panic that is occurring in the stock markets.

"We do have empirical evidence that in Sweden, where they had a similar meltdown, the government intervened and the crisis only lasted a matter of a very short time," Erickson said. "And in Japan, they let the markets work it out — and they do — but it took 10 years."

When the government bailed out 747 savings and loans associations in the late 1980s and early 1990s for $125 billion, the government ended up making money, Erickson said.

"That’s what people are predicting will happen this time as well," she said.

The bailout, $85 billion of which saved insurance giant American International Group, will ease a domino effect of failing businesses, said Greg Chase, assistant professor of economics.

Since so many financial institutions rely on American International Group’s financial insurance, Chase said, those companies may fail if their insurance company fails.

"(The government is) afraid of the contagion effect where it would spread to other companies, you know, even though there’s not a problem with these companies," Chase said. "... You start having these other companies go under, then you have a problem, because it’s going to be like a domino effect and they’re trying to stop that."

The recent "market meltdown" can be blamed on mortgage brokers and subprime and adjustable rate lending that caused people to buy homes they could not afford as well rating agencies that did not adequately rate the risk of companies, Erickson said.

She noted that Lehman Brothers had a triple-A rating until the night before it defaulted.

"Somebody wasn’t doing their job, and they’re guilty as well," she said.

The factors combined created a perfect storm of reverberation in the global markets, Erickson said.

Erickson expressed confidence that the market would rebound, but said future lending and borrowing practices will not be as free in the future as they were a year ago.

"I think that’s what will happen. People will build smaller houses." she said.

Erickson plans to present her knowledge to the Brenau community again in the coming days.



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