Understanding the Crisis in the Markets: A Panel of Harvard Experts
October 3, 2008
For alumni and friends who missed the Harvard Economic Forum webcast on recent developments in the U.S. and world markets, an archive version is now available below.
With a bailout plan recently approved by the Senate and House of Representatives, join the conversation and tell us your reaction to the current economic crisis and the current plan to stabilize the financial markets.
Please Update your Flash version to view this video.
The panel includes the following faculty members:
Robert Kaplan, Professor of Management Practice
Jay Light, Dwight P. Robinson, Jr. Professor of Business Administration and Dean of the Faculty of Business Administration
Gregory Mankiw, Robert M. Beren Professor of Economics
Robert Merton, John and Natty McArthur University Professor
Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy
Elizabeth Warren, Leo Gottlieb Professor of Law
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October 22nd, 2008 at 6:47 pm
Do you feel that Seniorage of the US Dollar is in danger?
October 22nd, 2008 at 7:22 pm
Harvard cannot remain indifferent to its role in this crisis. As its graduates blindly swarmed Wall Street and the endowment seemed tectonic in its rise, did Harvard lose touch with its center, its own core ethic? The crisis is one of faith, ultimately one of values. We will not recover from this as an institution or a nation by worship of the achiever. Harvard has seemed blinded by its achievement, arrogant in its riches despite wonderful opportunities offered to poor students. This crisis will end when, together, we return to community. When we understand and share each other’s burden in what will become a profound social revolution, we’ll understand why crisis had to happen.
October 22nd, 2008 at 11:35 pm
An older lady (we’ll call her “Bonnie,” who works with us at Pepperdine University making approximately $30,000./ year (give or take $3K) owns a home in Malibu (which she did NOT inherit) but which her ex-husband and she put a down payment on ~ 40 years ago. The home, located north of Zuma Beach, is in an exclusive area of Malibu and is worth (even after the debacle in the market) currently $8 million dollars. She has been securing all kinds of mortgages over the years — and will NEVER be able to pay it off. Simply put, many of us would love to live in her eight million dollar home, but we only make $80 or $90 or $100,000. /year in administrative jobs and wouldn’t be so irresponsible to “buy” an $8 million dollar home we couldn’t afford. So, why should our hard-earned tax dollars pay to keep Bonnie, a $30,000./year worker, in her multi-million dollar estate / home?
October 22nd, 2008 at 11:37 pm
Isn’t this current economic crisis also a result of irresponsible people who wanted things they KNEW they could not afford, but had a sense of “entitlement?”
October 22nd, 2008 at 11:43 pm
I just listened for 90 minutes to 6 expert Harvard panilists and I didn’t hear one word about Jimmy Carter’s Community Reinvestment Act of 1977 mandating that banks loan to mortgagors in risky areas; nor did I hear about Bill Clinton’s Federal Housing Enterprises Financial Safety and Soundness Act of 1992 which REQUIRED a portion of the loan purchases of government sponsered puppets Fannie Mae and Freddie Mac be allocated to affordable housing mortgagors
What professor Warren seems to fail to understand is that Wall Street and mortgage origination companies did not and would never have started such a foolish racket as lending money to people who could not pay it back nor provide sound collateral; In 1997 Bear Stearns was the first institution to publicly offer securitized CRA loans but ONLY AFTER Clinton MADE Fannie and Freddie guarantee this crap and implied AAA ratings; Only the idealistic view of Government could be so stupid as to invest our tax dollars into something so foolish
If Warren thought like an investor and not a lawyer she might put herself in the position of CEO or private capital investor and ask herself would she invest a few million in people who put little money down and offered collateral in areas that had little to no appreciation; I would suspect that she would do so ONLY if the ROI was sufficent AND MOST IMPORTANTLY if her investment was collateralized not only by a piece of property in a disstressed area but also by the US Government in the form of a GSE guarantee; I would be willing to bet that if you take away the GSE backstop Warren’s not putting one cent of her money on the line and neither is Bear Stearns or any of the others; Wall Street didn’t cause this; Socialist Government Officials Did!
Furthermore, there is nothing wrong with reset mortgages, they work great for investors; I have made tons of money using resets in RE investing; I don’t have a reset on my primary residence because I am not a moron; Warren believe you can regulate stupidity; well she’s a lawyer, lawyer love to make rules so that people never have to actually learn how to think and act reasonable; However, I must admit that in the same breath I rhetorically ask myself who is the real moron when the nation’s unqualified bought no money down homes, lived swell for a couple years, were forclosed upon, and then went back to renting like they had been before, having lost nothing; Who is the moron when this exact scenario multiplied over and over collapses the entire US banking system which is then bailed out by ME and YOU the American Taxpayer; Who’s the moron when Bush stands in front of the country at his 2003 state of the union address and indirectly acclaims Carter’s and Clinton’s social experiment by taking credit for the highest percentage of home ownership in US History; Who’s the moron? Well……….I guess I am, I am the one putting up with this socialist crap from my leaders and I have done nothing; I suppose it serves me right. I suppose all I can say is Who’s John Galt?
October 24th, 2008 at 6:23 am
As a European it is most interesting to follow the debate in the US, where each party accuses the other participants in this debacle. It isn’t true that each group should look at its own mistakes:
the homeowners and consumers for taking out loans which they could not repay;
the mortgage brokers and bankers for encouraging borrowing when they must have know that the borrower would not be able to repay;
the investment bankers that invented debt instruments that were not hiding the real risk and from which they were making big profits and big bonuses;
the rating agencies that were giving best ratings to junk;
the insurance companie that were offering insurance on junk; and
the final buyers of the “junk” securites (incl. German banks):
the member of Congress and the administrations that were encouraging home mortgages to borrowers who were not qualified.
The US has to fundamentally rethink its political, social and economic system. The policy of not saving, but borrowing and spending is unsound — for consumers as well as for governments.
I have strong doubts that the country and its citizens are willing to enter into such fundamental debates, make an objective analysis and take a new direction. Will they just carry on?
I am European, but I am interested in a prosperous, strong and stable USA. It is good for America, Europe and the rest of the world.
Klaus R. Schroeder
October 24th, 2008 at 9:17 am
All of the talks were excellent. I would think a regular series would be highly valued by alumni and the general population.
The country has largely been in a 20 year dream.
The bidding up of the housing market and stock market has made everyone feel clever and richer, though that has also increased inequality in a similar way to that of the 1920s.
Financial innovation appeared a way out of the mess of uncompetitive manufacturing industries and increased global competition. Resources were diverted towards the already bloated financial and real estate industries. I returned to the USA in 2003 to find everyone I met trying to sell me a house as they all passed their real estate exams. I resisted partly as I had experienced the housing bust in London in 1990 where the market disappeared for five years after a 30% fall, triggered by an increase in interest rates.
While it was clearly presented that no one thought it possible that house prices in theUS could fall all the signs were there. Usually house prices falls are triggered by interest rate increases or by recession. Interest rates have largely been low; but the slowdown in growth combined with the over-leverage of all concerned was enough to stop the music in our national game of musical chairs invented by Ponzi.
The thing that really bothers me about this mess is that when someone lands on the floor without a chair or house, everyone lucky enough to have a chair to sit on or a house to live on gets up to kick the person on the ground. Call it property rights or free markets, but the lack of sympathy felt is a real difference to the America I grew up in the 1950s. It is easy to make a bad investment particularly when you are being given bad advice, and being swept by a national mania.
I suspect the explanation of stagnant wage growth, increasing inequality, and loss of opportunities in a globalized world has made Americans particularly susceptible to manias.
This is not the first mass delusion that the US has experienced in recent years. The dot-com boom suggested that new companies with no profit, no revenue, but an idea could command billions on future earnings. Deregulate the gas and electricity industries and take advantage of economic efficiency rather than the brownouts, fraud, and bankruptcy that resulted a few years later. Those were just appetizers to the main course, the housing boom. This was mass delusion on a scale approaching 1929: consumers, bankers, governments joined the fun.
This drastic loss of wealth is starting to feed through to the real economy with
job losses and corporate losses. My father who was in college in 1931 used to tell me of about the great depression. It took 5 or more years to respond to the events of 1929 to make use of Keynesian theory and bring the country out of depression. Now partly because times have been good, that theory is out of favor, and we are likely to fumble around for quite a while before taking the necessary action of public spending to get the economy going.
This is also about dependence on technology. When I worked in investment management
in the 1980s, computerization was fairly primitive, and we had to know all our
positions in our heads. This limited the speed and complexity of trading.
Now, the sheer volume of trading, much generated by computerized strategies. The complexity has been faster than the computers to provide clear reports, and many important issues like liquidity or credit are never handled. Its ironic that many of the physicist who left physics for fame and fortune in finance, are now facing the same kind of recriminations leveled at nuclear scientist with the creation of the bomb.
It about people. Fairly aggressive people end up at the top at investment banks,
whether or not they paid attention in EC10. While an academic flips a coin 5 times
head and wins a bet, he might say he is lucky. A trader may say that he the master of
the universe, Big organizations are political, people protect themselves by overspecialization,
and managers have layers of underlings that take the heat when things go wrong.
The structured instruments themselves are largely examples of Adam Smith’s pin factory gone wrong, where mathematicians, accountants, and lawyers end up with instruments explained by 400 pages of legalize. It was never really considered in all their complexity what would happen if someone got sick and couldn’t pay their mortgage.
The management of these big banks was not up to snuff to protect the interests of their shareholders, employees, and the country. They had created worlds with no transparency to the outside to keep off meddling shareholders and regulators, but were hoist by their own petard as they could not understand it themselves.
In the same way that the Great Depression unleashed lots of changes, not all of them good (take WWII, atom bomb for a start. ) it is hard to see the outcome from the events of 2008. I don’t think anyone has any real explanation or solution; it’s a high priority for Americans to sort out this mess. I have always thought that the country could turn to Harvard for inspiration and for leadership during our times of crises. Franklin Roosevelt and J F Kennedy made the country a better place.
I would certainly like to volunteer my services to help the nation, but really don’t know who to contact.
October 25th, 2008 at 3:20 pm
I found this fabulous for breadth of insight. It was 90 minutes very well spent. Thank you!!
October 25th, 2008 at 4:46 pm
With all the analysis that is being done, nobody seems willing to see that we have had an old fashioned bubble, fueled by easy credit, just has been the case with the many bubbles that have occured periodically through the last millenium. The facts are easy to find and see. Start with the central banks and have a look at the rate at which their assets (particularly non gold, non SDR assets) were growing; then go to the commercial banks and the story repeats itself.
Because the bubble occured in the banking systems of the world, it is not surprising that the inflation that it created was an asset inflation and not a consumer price inflation, so it went largely unnoticed by the general public who were conned (once again) that the trees were growing to the sky.
The aftermath of the bursting of such bubbles is also fairly predictable - money simply disappears; that is because the banking system has the ability to both create and destroy money. Right now, it is being destroyed because too much of it was created. This is a tide that cannot be turned back much as we would like to. Two, and only two outcomes are possible: inflation or deflation. Both lead to the same spot - a sustainable equilibrium. The losses that arise in getting there, however, are differently distributed depending on whether we have inflation or deflation. Unfortunately, there is a price for partying too hard and that cannot be avoided.