Though the panel was planned months in advance, a quartet of professors charged with discussing solutions to the current recession ended up talking about the news of the day.
After all, they met just hours after President Barack Obama signed a $787 billion stimulus package into law.
Before an audience of over 350 in the Law School auditorium Tuesday night, economic professors John Geanakoplos ’75, William Nordhaus ’63, Robert Shiller and Yale Law School deputy dean Jonathan Macey LAW ’82 offered their perspective on the financial crisis in a panel moderated by University President Richard Levin. Although the professors agreed that the stimulus package was insufficient, they differed upon both the causes of and solutions to the economic malaise.
Nordhaus, the first among the panelists to speak, offered a broad view of the crisis. Although the burden to “clean up the mess left by private greed and public indifference” fell upon the Obama administration, Nordhaus said, the stimulus package fell far short of rejuvenating an economy plagued by near-bankrupt banks, an unprecedented decline in household wealth and a massive federal budget deficit. But Nordhaus also warned that future governmental intervention could trigger the opposite effect.
“The problem is if we need another dose of fiscal stimulus, there will be increasing resistance,” said Nordhaus. “At some point, people will say, ‘I might take my chances on the economy.’ ”
Shiller broke down the financial crisis with his trademark approach that combines economic theory and behavioral science. Shiller said “animal spirits” — the inconsistent nature of human thought — caused the recession, at least in part. Shiller argued for a significant rebuilding of the global financial system. He proposed improving information infrastructure, fostering innovation in the field of risk management and establishing financial products — such as home equity insurance — that could shelter consumers from market fluctuation.
Geanakoplos linked the recession to his own theory about “leverage cycles,” where continually rising asset prices make lenders comfortable with issuing loans backed by minimal down payments. When a bubble bursts or asset prices decline, lenders find themselves facing a loss.
When the subprime market collapsed two years ago, Geanakoplos said, the government should have intervened immediately. Geanakoplos argued that the Federal Reserve’s decision to address only interest rate issues allowed the problem to spiral out of control.
Speaking from the perspective of the law, Macey said he found fault with how the stimulus package was presented, calling its roll-out “fundamentally anti-democratic.”
“All sides were taking the professional, elitist position that says, ‘Average people really don’t understand [the economic crisis],’ ” said Macey.
Macey proposed an alternate solution to the financial crisis: immigration. Newcomers to the country, Macey argued, would spur domestic demand and pick up the slack in the nation’s housing market. He called his solution the “Levin plan,” in reference to the 15 percent growth in Yale’s undergraduate student population expected to accompany the planned construction of two new residential colleges.
“It’s the simple, old-fashioned American way,” Macey said. “We’ll see new attitudes and a new entrepreneurial spirit.”
Audience member Jacob Gramlich GRD ’09 said the economic problem is too complex to be solved by the four professors alone, despite their insight.
“I think each of them understands some piece of the economy much better than I or anyone here,” Gramlich said. “But it’s fair to say it’s hard for even them to come to consensus on a solution.”
Harsh Poddar, an undergraduate at Duke University, said he wished the professors had offered alternative perspectives on certain aspects of the crisis.
“They definitely leaned toward the side that banks should not be allowed to fail,” Poddar said. “It would have been interesting to see what people who believed in the other side had to say.”
The Yale College Council and the Yale Student Investment Group co-sponsored the panel, a follow-up of a discussion held in October 2008.