Professors offer views on recession

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.

Professors discuss the impact of the recent economic downturn, as well as possible solutions, at a panel co-sponsored by the Yale College Council and the Yale Student Investment Group.
Sergio Zenisek
Professors discuss the impact of the recent economic downturn, as well as possible solutions, at a panel co-sponsored by the Yale College Council and the Yale Student Investment Group.

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.


  • Video?

    Did the YDN video-tape this?

  • Townie

    Hmmm…opinions from the folks who got us into this mess. At least one of these guys is (was?) a partner in a Hedge fund.

  • Goldie '08

    I was lucky enough to take classes tought by the 3 economists on the panel and they are some of the best economic minds in the country. A videotape would be nice

  • George Patsourakos

    George Patsourakos
    Americans need to realize that our current economic slump can only improve on its own -- and that will probably take at least three years. You cannot control the economy by throwing billions of dollars at it, any more than you can control a downpour of many days by confronting it with billions of blow dryers. I find the economic stimulus package -- which I prefer to call the economic stimulus nightmare -- to be a panic ploy used by President Obama, who was successful in obtaining congressional approval of it less than a month into his presidency. This $787 billion nightmare -- paid for by American taxpayers' hard-earned dollars -- is the largest amount of money ever approved by Congress in any law. This law also marks a turning point -- and sets a bad precedent -- for the federal government taking over a good portion of the private sector of our economy, and this will inevitably lead to socialism soon replacing capitalism in America!

  • Yale 08

    We are a nation with a pathetic savings rate, a services economy without productive capabilities, and now Obama is sending $700 billion streaming into the system.

    He is trying to reinflate the bubble! Unfortunately, the burst was not repaired.

    We are f'd. Just wait until foreign currencies stop pegging to the dollar.

  • Anonymous

    Actually, George, you're just wrong.

    You CAN help an economy by throwing billions of dollars at it. You see that money, once it's spent, ends up in the hands of Americans, who will then spend that money, which again ends up in new hands, and so on. And that cycle is exactly what an economy (and it's health) is - money changing hands from person to person.

    And before you start screaming next year that the stimulus "didn't work" because we're still in a recession, remember that the best economic minds mostly agree that the stimulus needs to be about $3 trillion to actually pull the economy out of recession - something people like you are certain to block. This doesn't mean that the money is thus wasted - wherever we are at that point, we'd in much worse shape if the money had never been spent.

    I am so sick of hearing people suggesting that we just stick our heads in the sand. As these economists astutely point out, inaction is exactly why this mess went from bad to worse.

    I wonder if you also used to believe that government regulation should not be allowed to "stifle innovation" of the major banks. All of these ideological (dare I say religious?) beliefs are nothing more than gut feelings that completely lack the support of evidence or mainstream economic logic.