Financial Markets: Lecture 17 Transcript
April 2, 2008
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--there's been so much news; I want to just briefly comment
about what's 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, we're 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--it's 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 it's getting
bad and as a result we're 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; it's unlikely that the Paulson proposal will be implemented partly
because it's being proposed by a Republican administration--well, not just Republican, just an administration
that's coming to an end and we're having an election.
This Paulson proposal probably has very little chance of being implemented as is, but it's put in to change the
discussion and it's 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 it's 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 I'm 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 it's dead on arrival or it's--
someone said it's an amateurish proposal.
All the groups that stand to win or lose from it are all figuring out what it does to them and they're 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