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Oregon State University President Ed Ray discusses the current economic situation and bailout plan. Ray has a doctorate in economics from Stanford University.

President Ray on economy: 'this too shall pass'

Former chair of economics at Ohio State University shares his view on current slump plaguing country, world's markets

By: Carly Dougher

Posted: 10/7/08

With the economy taking a dive and heading into recession, OSU president and published economist, Ed Ray, urges students to hang on and ride out the financial drought.

After the Dow Jones dropped 778 points last Monday, many investors' worst nightmares were confirmed. With this painful drop, more than a trillion dollars in paper wealth vanished.

While this amount of money is unfathomable to most, and while the hit was felt all across the nation, Ray was quick to put it into perspective.

"People's worst expectations were that this is it, melt down - the world is going to end," Ray said. "But you know what, they got up this morning, the sun came up, and today is a new day."

What many students at OSU don't know about their university's leader is that prior to his position as president of OSU, Ray was on the chair of economics for 16 years at Ohio State University. There, Ray conducted research on a variety of economic arenas.

His areas of expertise include international trade, tariff/non-tariff barriers, financial development issues, and American economic history. His background also includes experience in various tax and social security issues.

For those who don't fully understand the economy, this financial calamity can be especially overwhelming.

In an interview discussing the foundation beneath this economic downturn, Ray explained how the Federal Reserve Bank's low interest and easy credit policy led to the present state of the economy.

While credit was easy to come by, people began borrowing and acquiring assets and real-estate, non-bank financial institutions began acquiring mortgages and companies like AIG began selling insurance protecting against the risks associated with these mortgages. This series set the playing field high and did not take into account the correlation between risks in the mortgage market.

"My understanding is that companies like AIG made a critical error," Ray said.

To emphasize this risk, Ray compared mortgage insurance to health insurance. "If they have health insurance on you and me, the likelihood that you and I are going to be sick at the same time, unless there is some type of influenza, is pretty low," Ray said.

"Mortgages are totally different - if the housing market sags as it has, then the likelihood that my mortgage is not what it used to be is very related to what is happening to your mortgage."

At the same time, consumers were taking advantage of the low interest rates and buying/selling houses. As real-estate sales increased, there was a rapid appreciation in housing. During this time, Americans purchased houses that they really could not afford but were able to buy them with low interest loans.

"People felt wealthier because they could see their neighbors' houses going up in value, so they saved less and bought more," Ray said. "Some of them may have spent some of the equity they saw in the housing appreciation."

However, this build up was just a bubble in the housing market, and inevitably it burst.

"As housing prices leveled out and even started to decline there were people who realized that they had bought mortgages for houses that cost them more than the current market of the housing," Ray said. "As the housing market continued to retreat, some people defaulted on their payments, and some people had to go into bankruptcy."

With finances tight, consumerism has slowed. People are no longer as willing to lend money, making difficulties for both businesses and consumers.

As the economy works to recover, Ray said he will not be surprised if the housing market drops 10 or 15 percent below what it should be before it will come back up.

"What history teaches us is that when bubbles occur, prices don't just go down to where they should be, they always go down further," Ray said. "Just as people got too carried away on the upside, they get too scared on the downside."

When asked his opinions of the proposed $700 billion bailout, Ray is clear on one idea: there needs to be an effective system of oversight.

"A couple of attributes that I like about the proposed bailout bill is that now, the treasurer doesn't get to do whatever he wants without legal or judicial responsibility," Ray said. "There needs to be oversight, there needs to be transparency, and there needs to be accountability… those who got us into this mess shouldn't be able to get rich and walk away."

Although it is still unclear at this point what exactly needs to be done at the governmental level, Ray remains positive that the economy will recover.

"Something will be done. The looming question out there is that nobody has really sized the beast," said Ray. "Nobody knows how big the problem is and we won't know until we play our way through it."

"Two things you don't ever want to watch being made are laws and sausage," Ray said. "What we have been watching for the last ten days has been congress trying to make financial sausage. And it's been pretty ugly."

Ray's biggest concerns with the economy's downturn involve the uncertainty around the size of the problem itself.

"There is absolutely no sense of magnitude of the equity problem that we face," Ray said. "The bottom line is this: whether it's some modified version of the bailout that passes or something quite different - I don't know of anyone who believes that we don't need to get equity into the system."

The market is expected to recover and the economic slow-down will not be permanent. However, it may get worse before it gets better.

"The typical expectation is that economic slow-down will continue and maybe get a little worse for the next two or three quarters," said Ray. "And the expectation is that we ought to start seeing a recovery in the economy in the later half of 2009."

The year 2009, however, is strictly an estimate, and depending on the gravity of the financial aspects of this recession, a recovery might not be seen until 2010.

When asked how the economy will affect students graduating during this recession, President Ray simply pointed out that while it may be a more difficult way to start, the recession will only be temporary.

"The first job might be harder to get than it otherwise would be, but when you think about it, you could be working for 35 to 45 years as people are living longer, healthier lives staying in work," Ray said. "This too shall pass and you will be okay."