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Yale Economists Discuss the National Financial Crisis
One hour video
One hour video
In front of an audience of Yale alumni, university president Richard Levin hosted a fascinating discussion Tuesday on the financial crisis with John Geanakoplos (James Tobin Professor of Economics) and Robert Shiller (Arthur M. Okun Professor of Economics).
All three professors challenged the Obama administration's approach to fixing the crisis, with Geanakoplos and Levin laying out the most withering critiques.
According to Geanakopolos, the premise behind Treasury Secretary's Tim Geithner's plan is fundamentally wrong. Alluding to the famous "pound of flesh" loan in Shakespeare's "Merchant of Venice," the fast-thinking economist emphasized that the solution to the foreclosure crisis is not to reduce mortgage interest rates but to write down the principal. If a homeowner's principal is reduced, "he's going to find a way to pay... It's common sense to me and it's frustrating to me that they're not doing it."
In addition, he emphasized that the government needs to "re-leverage" the system, explaining that one of the causes of the crisis was the high level of leverage in recent years, which alarmingly grew to 16 to 1 with toxic securities.
"Warren Buffett and Bill Gates could have put $150 billion down and bought every single toxic security (totaling $2.5 trillion) in the country." Wealthy optimists end up holding most of the assets and lose their money when the assets crash, explained Geanakoplos. "Once the optimists disappear, activity stops" because the general public isn't buying or selling assets.
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All three professors challenged the Obama administration's approach to fixing the crisis, with Geanakoplos and Levin laying out the most withering critiques.
According to Geanakopolos, the premise behind Treasury Secretary's Tim Geithner's plan is fundamentally wrong. Alluding to the famous "pound of flesh" loan in Shakespeare's "Merchant of Venice," the fast-thinking economist emphasized that the solution to the foreclosure crisis is not to reduce mortgage interest rates but to write down the principal. If a homeowner's principal is reduced, "he's going to find a way to pay... It's common sense to me and it's frustrating to me that they're not doing it."
In addition, he emphasized that the government needs to "re-leverage" the system, explaining that one of the causes of the crisis was the high level of leverage in recent years, which alarmingly grew to 16 to 1 with toxic securities.
"Warren Buffett and Bill Gates could have put $150 billion down and bought every single toxic security (totaling $2.5 trillion) in the country." Wealthy optimists end up holding most of the assets and lose their money when the assets crash, explained Geanakoplos. "Once the optimists disappear, activity stops" because the general public isn't buying or selling assets.
.
.
.
.
.
.
.