2018 marks ten years since the advent of the 2008 Financial Crisis, an event to which all of Econlib, including EconTalk, devoted a great deal of space. In this episode, host Russ Roberts welcomes back Stanford University professor of finance and economics Anat Admati to revisit the Crisis. Of this seminal event, she says, “… it changed my life. I mean, it taught me so much. I can no longer be what I was a decade ago.”
Of course many people were affected, some tragically, by the crisis. And this crisis seemed somehow different from previous scares. Roberts and Admati discuss, for example, why this crisis was so much more harmful than the dot-com bubble of the early 2000s. Their conversation ends with Roberts asking, if things are so bad, and “too big to fail” is still in place, why have we not seen another crisis in ten years?
1- Admati says she lived in a “sheltered bubble” prior to the crisis. What was the nature of that bubble, and how did she re-evaluate and change her position post-crisis?
2- What kind of financial sector risks is Admati worried about today, and why?
3- What does Admati mean when she says, “… the inefficiency of banking is fundamental to banking?” Is the FDIC a net positive for consumers post-crisis? What role did it play in the crisis? (And why does Admati say of consumer bank depositors, “… we are the nicest creditors in the whole economy. “)
- P.S. You may want to read more about the FDIC in the entry on “Financial Regulation” in the CEE and at Investopedia.
4- How do Roberts and Admati evaluate the role of economists and business professors in the policy response to the crisis? To what extent do they share Luigi Zingales’s accusation of “capture?”
5- What is “big-shot-ness syndrome,” according to Admati, and what role did it play in the crisis? Which sector do you think is most susceptible to this syndrome- academic economists, policy makers, the media? Explain.
READER COMMENTS
Kevin Remillard
Dec 12 2018 at 8:02pm
Enjoyed the Amy Willis podcast “Lessons Learned and Unlearned”. Exposure to capital markets, asset concentration, and liquidity are the core principles of banking. These can be exploited, mitigated, transferred, avoided, and accepted.
Amy Willis
Dec 13 2018 at 9:51am
Thank you, Kevin!
Malcolm C. Harris, Sr.
Dec 13 2018 at 2:36am
Admati lived in a “sheltered bubble” prior to the crisis, because academic economics and finance went there separate ways back in the 1960s. As an undergraduate in the ’60s, and entering graduate school in the late ’60s, I learned no finance in school. Thus by 2007, most younger finance professors knew little or no economics and most younger economics professors knew little or no finance. In 2000, when the Financial Management Association instituted its Fellows in Finance honor, the majority had their degrees issued by economics departments. Talk to new Ph,Ds. in Finance and you find a cat of a very different stripe. Similarly in 2006, not one economist in a hundred could explain how bank reserves are assets and bank capital is on the liabilities and equity side of its balance sheet.
As specializations ran rampant, it is little wonder that the two professions described the U.S. economy and financial system in 2006 and 2007 much as the seven blind men described the elephant.
Professor Admati’s righteous indignation might be tempered by looking more closely at bad policies (HUD and politicians enslaved to the housing lobby demanding more and more “affordable housing” from Fannie and Freddie in the form of more and more subprime loans, the Fed’s overexpansion of credit, the lack of regulation of investment banks due to Glass-Steagall, the moral hazard of deposit insurance, the Fed’s sterilization of its lending to the big investment banks and universal banks, etc.) which systematically distorted the economy, caused the crisis, and caused and deepened the recession. I agree banks should have more capital (i.e., equity), but eliminating bad macroeconomic and macroprudential policies would reduce the systemic stress that that capital must buffer banks against.
Yes there are villains, but my list of unindicted co-conspirators is much longer (it runs pages) many of who are never mentioned as villains of the piece (for example, Andrew Coumo, Alan Greenspan, to name but two.)
Amy Willis
Dec 13 2018 at 11:22am
That’s a really good point re the changing nature of PhDs. Is this simply too specialized, or are we seeing new fields (rightly) emerging altogether?
I can’t also help but to agree with you re: the longer list of of culprits; excellent point!
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