Is the financial system too complex for the country’s good?
Did it all just get too complicated? And if so, how do we deal with it?
It’s the economy, but this isn’t stupid. Quite the opposite when two Nobel laureates—Robert Merton, MIT PhD ’70, and Institute Professor Emeritus Robert Solow—argued different approaches to making sure what happened to the U.S. financial markets in 2008 doesn’t happen again.
Dean Emeritus and Howard W. Johnson Professor of Management Richard Schmalensee moderated the talk, held this afternoon at MIT Sloan’s Building the Future event.
Merton, who returned to the School last year to teach in the new Master of Finance program, blamed, to some extent, a lack of financial education and insight for the people involved in and watching over the U.S. financial system. But those problems can be remedied, he said, arguing that more layers of government regulation are not a panacea for the problem of financial complexity.
“Without [education], he said, “passing all the rules in the world won’t matter.”
While not giving a pass to “bad behavior, fools and knaves,” and “highly questionable” credit evaluation, Merton said many people who could have known better may have been lost in the labyrinthine turns of modern-day finance.
“There’s an instance, at the core, where this got completely out of hand,” he said.
“What happened here, I think, is what you might call plumbing,” he added. “It’s not something we didn’t understand. We didn’t understand how complex it is.”
Asked what business schools like MIT Sloan can do to prevent future collapses, Merton argued for more: More education and more financial training for more people in more key positions.
“Did we miss things?” Merton asked. “Absolutely. Did everyone miss something? Absolutely. Did we learn something? I think so.”
“This is not something where we have to rewrite the book,” he said. “Add to it? Yes.”
Solow agreed that things got out of hand, but argued that many of the problems that led to the financial crisis may have been unnecessary to begin with. Finance, he said, does not exist for the sake of finance. It exists, he argued, for the production of goods and services, and to facilitate the growth of society as a whole.
“How much of the financial sector do we need?” he asked. “Was all this slicing and dicing that was done of use to the mortgage market?”
Solow gave good marks to the Federal Reserve Chairman Ben Bernake for his handling of the Troubled Asset Relief Program (TARP). And he lightly praised President Obama’s stimulus plan, calling it an “imperfect solution” that nonetheless mitigated some of the fallout of the financial collapse.
Recovery is possible, Solow said, but it will require a makeup for the production shortfalls caused by the burst housing bubble and the accompanying loss of American wealth.
“What we need, what the economy needs, is a willing buyer of goods and services,” Solow said. “It’s hard to imagine at this point where that’s going to come from.” -
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