Profs address financial crisis

The all-star line-up in Sudler Hall Wednesday night did not pick a horse, nor did they call the election.

Before a crowd of 300 students and faculty, a trio of economics professors and the deputy dean of the Yale Law School broke down the financial crisis and its implications as part of the Yale College Council’s Yale Votes! campaign. The panelists — economics professors Robert Shiller, William Nordhaus ’63, John Geanakoplos ’75 and Yale Law School deputy dean Jonathan Macey ’88 — stopped short of supporting either major candidate in the race for the White House, but offered economic pointers for whoever that man might be.

“I’m trying to stay non-partisan on this,” Shiller said. “What [the candidates] need to do is try and show some important reason they can improve risk management. You should choose the candidate that you think will do this.”

Shiller, arguably the most widely-quoted economist at Yale, drew comparisons between the current situation and the 1930s, calling this downturn the “biggest financial crisis since the Great Depression.” The necessary response almost equals another “New Deal” in magnitude, he suggested. And although he did not mention either candidate by name, Shiller seemed to imply that Obama’s candidacy — more so than McCain’s — paralleled that of Franklin Delano Roosevelt in 1932.

Other than Shiller’s remarks, conversation among the panelists hewed to matters of economics. Shiller called the crash the result of a speculative bubble, and said the bubble had created an investment culture in America. That cultural shift affected Yale, Shiller said, as increasing numbers of students turned to investment banking for a career. Openings in those jobs, he suggested, may now be significantly reduced.

Geanakoplos linked the economic crisis to his own theory of the “leverage cycle.” In the leverage cycle, collateral values continue to rise, making lenders more comfortable with giving out loans with minimal down payments. At some point, when the value of the asset used as collateral plummets, lenders find themselves facing a loss.

In focusing on a similar topic, Nordhaus criticized the securitization of loans for contributing the crisis. But the worst chapter of the credit crunch, he said, came when the federal government allowed the investment bank Lehman Brothers to fail.

“It overturned the presumption that such a large institution was too big to fail,” Nordhaus said.

With investor confidence shattered, the system froze up and the government was required to take extreme actions, Nordhaus said. In what was his closest mention of politics for the evening, Nordhaus praised both President George W. Bush ’68 and Federal Reserve Chairman Benjamin Bernanke’s action.

“Bernanke has shown great wisdom and leadership in doing what no Fed Chair expected to do,” Nordhaus said.

As for the president, Nordhaus quipped, “luckily, he decided not to decide this one. That decision was the wisest decision of his eight years.”

Macey criticized the government for failing to handle the worsening situation and failing to inspire confidence in banks and consumers.

“[The government], the central banker of the U.S., didn’t learn the basic lesson of crisis management,” he said. “The basic job of the central manager is to provide confidence.”

The School of Management economist Judith Chevalier ’89, the deputy provost for faculty development, served as moderator for the panel.

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