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Ten years hence

Panel moderators Scott Malpass and Richard Mendenhall describe some of the top takeaway points from the Ten Year’s Hence presentation: “The Ascent of Money: Part I.”

January 22, 2010

On Jan. 22, 2010, Scott Malpass, vice president and chief investment officer at the University of Notre Dame, and Finance Professor Rick Mendenhall presented a panel discussion titled, “The Ascent of Money.” Their discussion followed presentation of the documentary, “The Ascent of Money: Boom and Bust,” hosted by Harvard Professor Niall Ferguson. The film traced the history of money up to the recent subprime mortgage failure and the ensuing global economic crisis.  Following are excerpts from comments by Mendenhall and Malpass.

Mendenhall: Securitization is a good thing; it just has to be used properly. It allows for spreading of risk and less dependence on geography for mortgages. But it can be misused, as we’ve seen.

Mendenhall: The future of what regulation should look like is a complex question. We have just initiated a center in the Finance Department called the Center for the Study of Financial Regulation. I would like to see regulation that doesn’t inhibit markets from doing what they are supposed to do, doesn’t inhibit prices from working, and doesn’t inhibit people and institutions from trading. But we shouldn’t allow institutions to take on extremely large risks.

Mendenhall: I don’t know if I want more regulation, but I want better regulation. People sometimes say you can either be for free markets or you can be for regulations. I think that’s ridiculous. I think that capitalism requires regulation.

Mendenhall: I do not see MBA programs or curricula as responsible for this economic crisis. We give students tools, but in this college we talk about ethical and responsible behavior. I think what caused this crisis to a large extent was a lack of knowledge and common sense on a huge scale.

Malpass: (As Notre Dame’s chief investment officer) I’m a global, long-term investor, so I have a different perspective than a lot of investors. I’m already skeptical of anything Wall Street is packaging and putting out. As we analyze what happened during the global financial crisis, securitization and other concepts that expanded credit and leverage went too far. There should have been more regulation. But Wall Street will always follow the rules of the game as far as they can.

Malpass: Notre Dame’s long-term investment strategy has not changed in response to the economic crisis. Its philosophy is of a value investor looking for really good investment partners to take a piece of our endowment pool. In reality, though, I think over the next five to 10 years the economy will experience a lot more periods of up and down, more extreme moves in both directions because of the uncertainty in the global economy.  We may have to be more tactical, taking more profits faster and looking for dips to go back in.

Malpass: What will come from this economic crisis is a lot of new regulation on Wall Street. Still, securitization was a very important part of the global economic expansion over the last 15 years. Done properly, it plays a critical role in providing cheaper credit to a broader array of people and will be important to the recovery and expansion going forward.

Malpass: I’m glad we’re going to have some increased regulation. I’m a pretty free market person, but I also recognize that you can’t have unregulated activity in everything that Wall Street’s doing. You have to have some limits on what can be done and some protections for the smaller or less sophisticated investor.

Malpass: The underlying problems in the U.S. economy are still there. The economy is very weak and there has been no job growth. Any recovery we have may not necessarily entail a lot of new jobs. There’s a lot of concern about overspending by the government, and that’s inflationary. Companies are reluctant to make a lot of long-term commitments and new capital projects, which I think will hurt hiring and job growth.

Malpass: I think the United Sates will always be at the middle of economic growth because our economy is so broad, rich and deep, and the rules of the game are so established. But the demographics aren’t as appealing as Brazil, China and India. Probably half of the world’s growth over the next 20 years will be more from the emerging world. We have fabulous partners in those markets. I think a lot of the success investors will have in the next 10 to 20 years will be of greater proportion from those markets rather than the United States.

Professor Richard R. Mendenhall is the Fred V. Duda Professor in Business and Finance Department Chair at the Mendoza College of Business at the University of Notre Dame. Mendenhall researches the role of public information in setting stock prices. He is a graduate of the United States Naval Academy and holds both MBA and doctorate degrees in finance from Indiana University.

Scott C. Malpass is vice president and chief investment officer at the University of Notre Dame, responsible for investment of the University’s endowment, working capital, pension and life income assets of almost $7 billion. Malpass is a 1984 graduate of Notre Dame and earned an MBA degree from Notre Dame in 1986.

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