耶鲁大学金融市场英文文本Financial-MarketsLecture-17-Transcript.doc

Financial Markets: Lecture 17 Transcript Professor Robert Shiller: I wanted to talk today about investment banking, which is a subject of some interest around here. First, I thought I would-theres been so much news; I want to just briefly comment about whats going on in the world today with our financial crisis. Notably, I think that this is the-it could be the biggest financial crisis since The Great Depression and as evidence of that, were seeing a lot of talk about what changes should be made. I think it reminds me of the very basic fact that we live in a financial world that was created in the wake of The Great Depression. So many of our financial institutions were created in the 1930s because that was a time when everything was being shaken up and it was a time when people were willing to consider something really different. If you just look back where various of our institutions-when they were created-its most likely to be in the 1930s. We are not yet at such a crossroads. The financial situation is not as bad as it was in the 1930s, but its getting bad and as a result were starting to see proposals for big change. Notably, on Monday, the Treasury Department, under Secretary Henry Paulson, announced a proposal for fundamental change in our financial markets. This proposal, if implemented, might be the biggest change since The Great Depression. However, the news is calling it dead on arrival; its unlikely that the Paulson proposal will be implemented partly because its being proposed by a Republican administration-well, not just Republican, just an administration thats coming to an end and were having an election. This Paulson proposal probably has very little chance of being implemented as is, but its put in to change the discussion and its going to be talked about a lot and I suppose it will influence what happens. The interesting thing is that the next President of the United States will likely have a mandate for big changes. Maybe its just as well that Fabozzi, et al. are slow to do a second edition of their book because if they got it out this year it would be a bad year to get it out because everything is changing. I studied the Paulson proposal carefully, since Im writing a New York Times column about it, which will appear Sunday. Reading the various commentaries about the proposal, I had the impression that not many of them are very-thinking very deeply about it. They typically-they like to talk about the politics of it and this thing, that its dead on arrival or its-someone said its an amateurish proposal. All the groups that stand to win or lose from it are all figuring out what it does to them and theyre taking the positions out of self-interest. So, I wanted to write something that was more perspicacious, if I could manage that. The interesting thing is, actually everyone calls it the Paulson proposal, but it was apparently mostly written by a young man who is in his early thirties. You may not consider that young, but I think that is young. He could have taken this course from me ten yearsactually, he didnt go to Yale. I looked it up; he went to American University, both undergraduate and-his name is David Nason-undergraduate and then he got a law degree at American University. Then he just went to work for the government. As far as I know, he doesnt publish; hes not in the newspapers, but hes gotten the ear of the Treasury Secretary. They spent many weekends together figuring out what should be done about the system and they wrote up a proposal. I like many aspects of it; actually, its an interesting proposal. Its not so much whats in the proposal as it is that this is the time for reconsideration. One interesting thing that they proposed is that we should have what they call objectives based regulation. We have-this is David Nason and Henry Paulson, although its not signed by them, its signed by The Treasury. So, The Treasuryits called a blueprint, a blueprint for reform of our financial regulation. Its built around what they call objectives based regulation. That means that the different regulators should each have their own objective, so they have a three-part proposal. The market stability regulator, which would make sure that the markets dont freeze up on us-we dont have a systemic crisis. There would be a prudential financial regulator and then, three, there would be a business conduct regulator, so thats the main part of the proposal. What theyre doing is emphasizing the different objectives of regulators. The market stability is going to be the Fed, but its not just banking. They want it to be-the Feds role would be broadened so that its not just a banking regulator, its the whole financial system. Its supposed to be maintaining the stability of the system. Then the prudential financial regulator is supposed to regulate-its supposed to aim at protecting the U.S. interest in various institutions that are guaranteed by the government, such as banks that are federally-insured or enterprises that have government guarantees or apparent government guarantees, like Fannie Mae and Freddie Mac. Then the business conduct regulator is supposed to regulate-what I saw is it would be aimed at-consumer protection; that it would make sure that businesses are protecting individuals. I find this interesting because it calls to mind some of the problems we had with the subprime crisis. One very important problem was, in the U.S. we have regulation divided up in crazy archaic ways. Different agencies were formed at different times and they have specific missions. For example, we have the Office of the Comptroller of the Currency. The OCC was founded in 1863 to supervise national banks but it only supervises national banks. Well, why not state chartered banks or why not credit unions or other things? Well, its just an accident of history. So, what these people are proposing is that we merge various agencies so that-define new agencies of the government that are separated by these different objectives; so, an objective defines an agency-a regulatory agency. What they want to do is merge the OCC and the OTS merger; thats one of the proposals. I wonder why they dont carry it further, but thats the thing they emphasized. The OCC is Office of the Comptroller of the Currency-regulates national banks. The OTS is the Office of Thrift Supervision; it regulates savings banks. So, we put the two together-that sounds sensible, I guess. Why are they separate? Various other things that they talked about had that form. They want to merge the Securities and Exchange Commission and the Commodity Futures Trading Commission. The Securities and Exchange Commission is the principal government regulator for securities. They make sure that everything is on the level and working right. They help prevent fraud, misrepresentation, manipulation of information in stocks and bonds. The CFTC is the Commodity Futures Trading Commission and it regulates our futures markets. There has been, over the years, a lot of turf battles between the SEC and the CFTC because its sometimes unclear whether something is a security or a futures. For example, when they started trading stock index futures, both these agencies thought it was in their turf because it involved both stock indexes and futures. Anyway, Paulson is proposing merging these. That makes sense and it seems like getting rid of some of this division of regulatory agencies is very beneficial. The division is what hampered regulators from dealing with the financial subprime crisis. People knew that a lot of bad loans were being made or loans were being made to people who shouldnt be getting them. Low-income people were being given adjustable rate mortgages with very low starter rates, called teaser rates, that would be raised in the future. They were given them with-in such a way that after the rates were raised, they likely couldnt afford to pay the mortgage anymore or theyd be under great stress in trying to do so. So, a family that bought a house-a low-income family buys a house they can barely afford it, then the rates go up on them. The parents would have to take out second jobs to try to-theyre just going to go bankrupt when that happens. It was, in some cases, unethical and it was plainly a problem and yet the regulatory agencies in the U.S. werent stopping it. Another reason why the regulatory agencies werent stopping these problems was because they often saw their mission in different terms. When I gave a talk at the OCC in 2005, I was asking them about, why arent you policing these mortgages? Their first answer was, well you have to remember we were set up in Abe Lincolns day to manage the national banks-thats our mission. I may be overstating their answer, but I got that flavor from them. You want us to go out and protect consumers, well of course thats a nice mission, but thats not our mandate. I think that what Paulson and Nason want to do is to create a separate business conduct agency that is aimed at consumer protection. So, it would be working parallel with these other agencies to-but their job would be to represent the consumer and that sounds like a good idea to me. The thing I stressed in my column was the market stability regulator, which is the Fed. What they want to do is expand the actions of the Fed, so that theyre not-you can describe the Federal Reserve or any central bank, traditionally, as a bankers bank. Remember, I told you the story of how the first-the Bank of England was the first central bank and it made banks keep deposits at the Bank of England. In other words, the banks were like customers of the Bank of England; they had to keep deposits there and the Bank of England watched them to make sure that they were behaving responsibly and had authority over them because it had market power. Well, the Fed is like that now, but what Paulson and Nason wanted to do is make it more than a bankers bank. They want it to be a bank for the whole financial system. Thats whats already happening. In fact, its just happening rapidly as we speak. I mean, in this last month, things have changed. The Fed has never given loans to anyone other then a depository institution that is a bank until last month, except they did so in the Depression. There was this long gap in the 1930s; the Fed was making loans to private companies that were not banks and then they stopped doing that, until last month. They created the-I mentioned it last time, the Term Securities Lending Facility and the Primary Dealers Credit Facility, which are lending outside the banking system. What Paulson wants to do is make that official that the Fed is no longer just a central bank; its a market stability regulator. This is going to be very controversial, but I think its a good thing to raise. In my opinion, this is the trend anyway and I think were going that way. The problem is that in a modern financial economy, we have so much instability, which is already built into the system, that we rely on something like a central bank to do things that help stabilize markets. I think that were probably going that way anyway and I think that in the next presidential administration well see an expansion of the role of the Fed. I wish the Fed had behaved better in the recent crisis in the sense-they didnt seem to recognize the bubbles that we had in the stock market in the 90s and the housing in the 2000s. If they are our market stability regulator, youd hope that they could do a better job. But, theyre what we have and I think that we should probably give them the authority to do that job and I think thats what we need to do. I was generally positive about their Treasury proposal. Another thing that they want to do, which has been talked about for some time. Yes?Student: InaudibleProfessor Robert Shiller: Yeah. He asked, why do the news media think that the crisis is already over? Secondly, why do they think we can prevent-thats paraphrasing. I dont know if the news media are concluding anything, but you do see-we have seen-over recent years, weve seen a lot of suggestions that the turning point is just around the corner and the news media report that. I think theres a bias towards optimism among business economists or among business people in general. Its not considered good form to say, I think were about to have a crisis of confidence and the whole house of cards is going to collapse. Its also not-its generally not in a business persons interest to suggest that, so were all instinctively trying to promote each others confidence and thats what business people do. They carry it a little further than that. I was asked to be on Kudlow and Cramer-Kudlow and Company show-I guess it was two nights ago. I turned them down, but they wanted to put me on opposite the CEO of Coldwell Banker, who is claiming that the crisis is just about to end. I did a little research, thinking I still might go on the show. I looked up CEO of Coldwell Banker, but I found that there was another CEO-this is a real estate brokers firm. There was another CEO a year ago who was on TV-just exactly a year ago-saying, I think this is the best time ever-the best time in at least ten years to buy a house. He said, the inventory is high; the market is bottoming out and so on. He was spectacularly wrong, but I notice hes also no longer CEO; so, these things happen. There is a general bias. On the other hand, I have to respect these people that usually financial crises end okay. There are repeated scares and usually its all right. We had a big scare in 1998; it started with the Asian financial crisis and then it spread to Russia and there was this terrible collapse in Russia in 1998, when the government couldnt pay its debts. Then that spread to the U.S. and people were very fearful, but the Fed, under Alan Greenspan, was very quick to respond and the whole thing didnt turn out to be anything so bad. The Fed again did like what its doing now; it rescued this company called Long Term Capital Management. Your question about whether we can prevent this kind of thing in the future is a deep question and I think that the problem is that our financial markets are inherently somewhat unstable. When we start thinking up really important new ways of doing financial business they start to grow and they get huge. They get bigger and bigger before you know it and its just amazing how things can suddenly grow and then nobody understands them; so theres a vulnerability. I was just-got the latest number-do you know how much credit default swaps there are outstanding? According to the Bank for International Settlements, there are now fifty-two trillion dollars worth of credit default swaps outstanding; fifty-two trillion dollars with the GDP of the United States is fourteen trillion. How can there be fifty-two trillion dollars of-these things only came in in the last ten years or so. I called an economist at the BIS and said, can you please explain it to me? Where is this fifty-two trillion coming from? I got a note from him and Im still trying to figure it all out. Thats what happens; the system performs very well and then it becomes vulnerable. Nobody understands all of it, so thats the problem. The other side of it, though, is there was a recent study that looked at financial crises and compared countries that have had financial crises with countries that havent. The conclusion was that countries that have experienced financial crises are generally more successful, on average, over the long haul, than countries that havent. In that sense, a financial crisis is a sign just that youre moving with the times and youre making a lot of money. Then things suddenly blow up on you, but youll recover and youll figure something out and then youll move from there. I dont know that Paulsons proposal-I kind of like them, but I think that theyre not enough; thats why Im writing a book about this. I think theres a lot more to be done. Even if you did everything that I would do, we would still have a vulnerability to financial crises. Part of the reason why Im endorsing this market stability regulator is that I think that theres no way that we can just guarantee-theres no way we can set up a system that is both very effective in allocating resources and that is also very stable. Just like when we went to the moon-when we sent people up into space-one of those space shuttles blew up. Well, thats what happens, but most of them made it all right. So, thats the way it is in finance as well. Anyway, Im here to talk today about investment banking, which of course is relevant to-this is all part of this general thing. Let me-I said earlier that investment banking seems to be a great interest of students at Yale; thats because they get some really great jobs there. Its a-investment banking is a very important economic institution and its fundamental-what they do is fundamental to what happens in our economy. So, as a result, people who work for them have a chance for a great economic success. Im not saying you want a job at an investment bank because its also demanding and difficult. Ive talked to some of our students who have taken jobs at investment banks and sometimes I think theyre probably too demanding. As a young person, you should be enjoying your youth and not getting dragged in to some huge investment bank. There are some terrible stories-young people who took-who left college five, ten years ago and they got a job at Bear Stearns and Bear Stearns demand-Im just making this story up, but it must be something like this for somebody-demanded eighty-hour, hundred-hour week devotion to the job, but they kept paying in Bear Stearns stock. The student was making millions every year. Meanwhile, his yo