Saturday, September 27, 2008

Harvard Profs Discuss the Whys and Hows

Listen (while you clean your room maybe) to an extraordinary good 96 minutes by a Panel of Harvard Experts.

  • Jay Light, Dwight P. Robinson, Jr. Professor of Business Administration and Dean of the Faculty of Business Administration

Crisis was caused by excessive leverage, too little transparency, and sudden drops in liquidity. To solve it, provide liquidity, design mechanisms to discover true values, and restructure system to avoid such run-ups in leverage.

  • Robert Kaplan, Professor of Management Practice

Middle-class squeeze. Stagnant real wages, higher costs: households did the rational thing, which is to borrow against your main asset.

  • Elizabeth Warren, Leo Gottlieb Professor of Law

Can I sell you a mortgage product complex enough that you can’t compare it with another investment? Can I persuade you that it is a great deal, when it in fact gives a (purportedly) much higher risk-adjusted rate of return to investors than the alternative, after the middle-men have taken their cut? But at the heart it is selling mortgages that are unsustainable from the first day.
Bailout is the wrong end of the dog. We're not dealing with foreclosure.

  • Gregory Mankiw, Robert M. Beren Professor of Economics

Bernanke looking at this through the lens of his research: Bernanke's (1983) is an analysis of the non-monetary factors in the Great Depression.
Obama: sheer unfettered capitalism. Freddy Mac and Fannie Mae are GSEs. Policy wonks from Harvard thought GSEs were trouble: politicians left it alone. Chris Dodd main recipient of campaign contributions from GSEs. Barnie Frank denied the problem.
McCain: greed and corruption. But this is not corruption, mainly. Stupidity and bad bets are not crimes. Greed – no doubt. Firing Cox? Hiring Cuomo, who was in HUD and behind move to get GSEs to lend to low-income people?

  • Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy

Financial sector very bloated. Huge profits and wages. Overinvested. Needs to shrink a lot more.
It’s true that bank failures were a big part of the Great Depression, but it’s not clear that a lot of the necessary shrinking would be inefficient. If financial sector is hyper-efficient intermediation, why does it have to take up such a big piece of the pie?

  • Robert Merton, John and Natty McArthur University Professor

Great loss of wealth.
Every time you plug some problem not using the market, when you substitute administration for the markets, you generate negative unintended consequences.
New fangled instruments. Complexities that no one understands.Structural relationship between financial innovation and risk of crisis: mismatch between successful innovation and necessary infrastructure to support it: regulatory, etc. Not practical to build 100 infrastructures in advance for the possible 2 successful innovations.

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