26. Learning from and Responding to Financial Crisis II (Lawrence Summers)

Financial Markets (ECON 252)

In the second of his two lectures in honor of Arthur Okun, Professor Summers points out that real interest rates have been very low in the current subprime crisis. This indicates that the shock to the economy was more a financial breakdown shock than a disinflation shock. But financial breakdown shocks are not necessarily very harmful to the economy, so long as financial intermediation capital is not destroyed. In a financial crisis like the present one, financial firms are likely to take the step of decreasing their leverage, often by contracting loans, which creates its own risks for the economy. Regulators should place pressure on financial institutions to raise their capital and should intervene in near foreclosure situations, but should not attempt to support housing prices.

00:00 - Chapter 1. Introduction and Recap
02:51 - Chapter 2. Understanding Recessions in Terms of the IS/LM Model
12:35 - Chapter 3. Financial Intermediation Capital: Essential for Economic Growth
23:08 - Chapter 4. U.S. Fiscal Policy Challenges and Objectives
36:44 - Chapter 5. Caution against Overdependence on Monetary Policy and the Federal Funds Rate
48:12 - Chapter 6. Obstacles in Introducing New Capital into and Increasing Direct Regulation of Financial Markets
57:50 - Chapter 7. Fiscal Policy Coordination in the International Context: Observations and Suggestions
01:06:56 - Chapter 8. Q&A: From Paulson's Proposal to Regulation of Lending and Leverage

Complete course materials are available at the Open Yale Courses website: http://open.yale.edu/courses

This course was recorded in Spring 2008.