Tuesday, November 19, 2013

More on Larry Summers and the MIT Econ Gang

In the the Summers/MIT gang post we linked to both an Arnold Kling piece on the Summers speech and to the Real World Economics Review map of the MIT Economics department interconnections.
Serendipitously an earlier (Nov. 12) post from Mr. Kling puts into words some of those same connections:

Larry Summers, 14.462, and Wealth Illusions
Thanks to Mark Thoma, I came across a recent IMF Conference honoring Stanley Fischer, who I have called the Genghis Khan of macroeconomics.

If I were you, I would jump to the last video, on policy responses to the crisis. The panel features Ben Bernanke (who wrote his dissertation under Fischer), Fischer, Ken Rogoff (who wrote his dissertation under Dornbusch, but perhaps had Fischer on his committee), and Larry Summers, who went to grad school at Harvard but who spent a lot of time auditing courses at MIT, including Fischer’s monetary economics course, which Summers remembers as being called 14.462 in the MIT catalogue. The panel is chaired by Olivier Blanchard, long-time protege of Fischer, and the first question during the Q&A comes from Jeffrey Frankel, another Dornbusch student. I didn’t find Bernanke or Fischer so interesting, so I would recommend fast-forwarding to minute 33, when Rogoff is speaking.

Rogoff eventually says that one source of financial crisis is ordinary debt. One of the reasons that debt is over-utilized is that it often comes with a government guarantee, either explicit or implicit. One solution he proposes is to get rid of bank deposits. Instead, he would have the Fed run ATMs, and the only transaction accounts people would have would be deposits at the Fed, which I’m guessing would not earn interest. In order to earn interest, people would have to invest in risky securities.. (Rogoff was racing through his talk at this point, so I am doing some interpolation here that might not be exactly correct.)

36 years ago, these were my homies. Rogoff makes some amusing remarks about the macro wars of that time, and I think he correctly pinpoints Fischer and John Taylor as two economists who “bridged” the freshwater and saltwater schools. Later, Summers mocks Minnesota, just as in the old days.

Summers gives the most provocative talk, and it becomes the focus of much of the subsequent discussion. He asks why it was that for the decade prior to the financial crisis we needed the wealth illusions of bubbles in order to maintain an economy even close to full employment. He argues that the full-employment, non-bubble real interest rate must have been below zero for a long time, and that it may remain zero for a long time.

In response to Frankel’s question, Summers says that this situation can be attributed in part to Moore’s Law. Computers as a form of capital are characterized by decreasing prices, and this created a state of chronic excess supply in capital markets...MORE