Understanding Crisis in the Markets: A Panel of Harvard Experts

The following link is to a video for "Understanding Crisis in the Markets: A Panel of Harvard Experts" which occurred on September 25, 2008. The panel of experts included

• 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

Arnold Kling recommends listening to three of the panel in particular,

Greg Mankiw (starts about minute 44) said that chapter 26 of his textbook explains the importance of the financial sector. [...]

Ken Rogoff (starts about minute 57) says that the financial sector needs to shrink. He's been writing that, and I've incorporated his views into my criticism of the Paulson plan.

Please listen to Ken, who is a respected policymaker as well as a leading academic. He calls the financial sector bloated, and he draws out the same implications that I do. In particular, rather than being a trigger for a new depression, the shrinkage of the financial sector is part of a necessary adjustment. But hear how he tells it.

Ken also describes our international position as precarious. He will drive Don Boudreaux crazy, because he sees this in terms of currency values and "our" trade deficit. But I think that the point that our government may suddenly find itself facing higher borrowing costs is certainly worthy of emphasis.

[Robert] Merton (right after Rogoff, but you don't want to skip Rogoff) is one of those speakers whose mind produces so many thoughts that all you get to hear are excerpts. One point he makes is that there has been a large real loss of wealth in housing, amounting to trillions of dollars.

Alex Tabarrok at Marginal Revolution has a short summary, by Elizabeth Warren of Credit Slips, of Ken Rogoff's discussion,

Any liquidity crisis is caused by the promise of a government bailout. Ken said that his many friends in investment banking said that there is plenty of money to invest in financial services, but right now it is "sitting on the sidelines." Why? Because the financial services industry does not want to pay the terms required to get that money back in circulation (e.g., give up equity). As he put it, why do business with Warren Buffett who will negotiate a tough deal, if you believe that the government will ride in soon with cheaper cash?

Ken also talked about the need to shrink the financial services sector. He thinks it is good that the investment banking houses are failing and many people on Wall Street are losing their jobs because, in his view, we have an oversupply in that sector and our economy just can't support it.

Ken's background with the IMF and on the Board of the Federal Reserve add a certain credibility to his assessment of conditions on Wall Street. If he is right, the $700 bailout is saving some investment bankers' jobs in the short term, but overall it is just making the financial system worse.