(Re)assembly Required

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Stockholm – No other authority could have convened the meeting. The twenty economists deemed to be the very top rank of experts on the financial crisis of 2007-08 converged on a conference hotel here last weekend to tell their stories to a Nobel Symposium on “money and banking.” Another forty macroeconomists, monetary theorists, financial economists, empiricists and historians discussed the work presented. A hundred or so policy-makers, practitioners, and others attended, including, primus inter pares, Nobel laureate Robert Lucas.

Periodic symposia, conducted in all prize categories since 1965, are one of the means by which Nobel committees reach their judgements; many other channels exist as well. One such economics symposium, on contract theory, in 1990, produced eight awards in subsequent years. The meeting previous to this one, on growth and development, in 2012, has so far produced one award, to Angus Deaton, of Princeton University.

The meeting on money and banking coincided with a celebration, the day before, of the 350th anniversary of the Swedish Riksbank, considered the world’s first central bank; the Bank of England was established twenty-six years later, in 1694. Created originally to facilitate war finance by marketing government debt, central banks have evolved over the centuries to become all-around stewards of the world’s monetary systems.

Credited with having prevented the recent crisis from becoming a depression, by organizing emergency lending, central banks’ relative independence from democratically-elected governments is under populist attack for having let the crisis develop in the first place.

Per Strömberg of the Stockholm School of Economics, who organized the symposium as chairman of the committee of the prize in economic sciences, opened the meeting by observing that money and banking had been more tightly integrated into the economics curriculum in the years before World War II.

With the specialization that followed the separation of the traditions of macro- and microeconomics, and, later, the appearance of departments of finance, originally in business schools, once-familiar aspects of banking topics became “bits and pieces.” They remained such until the crisis began. “At that point,” Strömberg said, “no one had put them together.”

The best joke of the meeting came as John Moore, of the University of Edinburgh, presiding at a session on leverage, meaning the relationship of debt to equity or collateral, adopted the persona of the announcer at a boxing match. Known for his general enthusiasm for theater (as well as for “Credit Cycles,” his 1997 paper with Nobuhiro Kiyotaki), Moore intoned, “At last we have arrived at the big event, a prize fight between… (dramatic pause)… a Russian! And a Greek!,” with an undercard consisting of “A Brazilian! And a German!”

Whereupon Andrei Shleifer, of Harvard University, took the floor to explain his theory (with Nicola Gennaioli, of Bocconi University, and Robert Vishny, of the University of Chicago) of how instability arises from neglected risks giving way to and exaggerated fears. Literary theories associated with Hyman Minsky and Charles Kindleberger were well-known, Shleifer said, “but very little formal work that tries to put it together” with macroeconomics had been done. “This is where we step in.”

Paired on the program with Shleifer was John Geanakoplos, of Yale University, whose paper “The Leverage Cycle,” attracted widespread attention in the spring of 2009. His fundamental ideas – that when margin requirements go down prices go up, faster than before, until, ultimately, they collapse, in a scramble to take possession of the collateral that has been pledged. “The financial accelerator has the same feel,” he said, except that the process he described involves risk, and a second price, that of the forfeit in the event of an inability to pay. “Nobody has said this before, except possibly Minsky.”

Discussants Markus Brunnermeier, of Princeton University, and José Scheinkman, of Columbia University, then took their turns, Brunnermeier tracing in some detail the various distortions of the Shleifer model in its run-up, crash, and recovery phases; Scheinkman invoking the film Groundhog Day and Nietzsche (“The eternal hourglass is turned upside-down, and you with it”); noting similarities to the South Sea Bubble of 1720; and touching on Geanakoplos’ familiarity with structured credit markets (he was a founding partner of a hedge fund, Ellington Management).

In his introduction, Moore had fretted that so fraught was the contest of claims in the session that it might turn violent. In that event he would call a halt to the proceedings. He had brought… (reaching into his briefcase) … a bell! A town-crier’s bell. He shook it vigorously. No clapper! No sound! It was a “‘No!’ bell,” he explained, to applause from the crowd.

However Moore’s “no” is interpreted, his big event is unlikely to pay off in tickets to Stockholm, at least not anytime soon. Geanakoplos has continued to work on his ideas, but without urgency; Shleifer has barely begun. More obvious prize candidates who featured in previous symposia – Michael Jensen, of Harvard Business School, in 1990; and Paul Romer, of New York University, in 2012 – have yet to receive a call.

Meanwhile, the other anticipated collision, between Gary Gorton, of Yale University, and Martin Hellwig, of the Max Planck Institute for Research on Collective Goods, produced little in the way of an exchange of views. Gorton elaborated on the meaning of “safe debt,” and presented the intuition behind his celebrated collaboration, with Tri Vi Dang and Bengt Holmstrom, on a paper about the nature of debt as collateral still inching its way towards publication after nine years. Hellwig, a gifted economist long away from the field (he served as head of German’s Monopoly Commission from 2000-2004) repeated his call for equity regulation. Holmstrom came along the next day in an unrelated discussion to reinforce Gorton’s point.

Especially impressive was Ben Bernanke, who described the crisis as a natural experiment of major proportions. He presented data on various credit market frictions as they increased in real time, supporting the argument that a “run on repo” had been at the heart of the panic, rather than a simple deterioration of bank balance sheets. “Why do we think it’s a panic and not just a big thing that happened?” Geanakoplos asked. Bernanke replied, “If there is such a thing as a panic, that was a panic.”

What did economists learn from the financial crisis? The Nobel committee’s answer to the question now enters a period of gestation. There is no telling how long it will last. It won’t come this autumn. Preparations for awarding this year’s prize are well along. The earliest the Nobel committee could weigh in is October 2019. Quite a lot rides on their verdict. As Strömberg noted, the reassembly of fields that had become disconnected will be the work of many minds over many years. While you’re waiting to find out how it begins, here is the symposium program.

On Day One, talks about asymmetric information, trading, and liquidity by Albert “Pete” Kyle, of the University of Maryland, and Darrell Duffie, of Stanford University, were discussed by Laura Veldkamp, of Columbia University, and Veronica Guerrieri, of the University of Chicago, with Dimitri Vayanos, of the London School of Economics, in the chair.

Talks about financial intermediation and liquidity creation by Douglas Diamond, of the University of Chicago, and Nobuhiru Kiyotaki, of Princeton University, were discussed by Neil Wallace, of Pennsylvania State University, and Emmanuel Farhi, of Harvard University, with Jean-Charles Rochet, of the University of Zurich, in the chair.

Talks about financial regulation, by Raghuram Rajan, of the University of Chicago, and Gorton, of Yale, were discussed by Amit Seru, of Stanford University, and Hellwig, of the Max Planck Institute, with Nicola Gennaioli, of Bocconi University, in the chair.

Talks about indebtedness of governments, firms, and households, by Kenneth Rogoff, of Harvard University, and Atif Mian, of Princeton University, were discussed by Alan Taylor, of the University of California at Davis, and Martin Schneider, if Stanford University, with Lars E.O. Svensson, of the Stockholm School of Economics, in the chair.

Talks about international financial crises by Carmen Reinhart, of Harvard University, and Ricardo Caballero, of the Massachusetts Institute of Technology, were discussed by Helene Rey, of London Business School, and Guido Lorenzoni, of Northwestern University, with Michael Bordo, of Rutgers University, in the chair.

On Day Two, talks about lessons of the global financial crisis, and crises past, by Ben Bernanke, of the Brookings Institution, and Barry Eichengreen, of the University of California at Berkeley, were discussed by Olivier Blanchard, of MIT, and Randall Kroszner, of the University of Chicago, with Guillermo Calvo, of Columbia University, in the chair.

Talks about leverage and cycles by Shleifer, of Harvard, and Geanakoplos, of Yale, were discussed by Brunnermeier, of Princeton, and Scheinkman, of Columbia, with Moore, of Edinburgh, in the chair.

Talks about theory and evidence in modern DSGE models, by Martin Eichenbaum, of Northwestern University, and Harald Uhlig, of the University of Chicago, were discussed by Sylvana Tenreyro, of the London School of Economics, and Ellen McGrattan, of the University of Minnesota, with Gauti Eggertsson, of Brown University, in the chair

Talks about the bank lending channel, by Mark Gertler, of New York University, and Jeremy Stein, of Harvard University, were discussed by Bengt Holmström, of MIT, and V.V. Chari, of the University of Minnesota, with Mariassunta Gianetti, of the Stockholm School of Economics, in the chair.

Talks about monetary policy, conventional and unconventional, by Michael Woodford, of Columbia University, and Stephanie Schmitt-Grohe, of Columbia University, were discussed by Emi Nakamura, of Columbia University, and John Cochrane, of Stanford University’s Hoover Institution, with John Taylor, of Stanford University, in the chair.

On Day Three, a panel discussion of the shortcomings of macroeconomic research on the crisis featured Annette Vissing-Jorgensen, of the University of California at Berkeley; Luigi Zingales, of the University of Chicago; Nancy Stokey, of the University of Chicago; and Robert Barro, of Harvard University, moderated by John Hassler, of Stockholm University’s Institute for International Economic Studies.

A second panel, a critical assessment of banking and finance research, featured Kristin Forbes, of MIT; Ricard Reis, of the London School of Economics; Amir Sufi, of the University of Chicago; and Antoinette Schoar, of MIT, with Bo Becker, of the Stockholm School of Economics as moderator.

With that, many of the participants walked a block from the hotel to the fast train to the airport, to catch their afternoon flights.

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