Can the transmission of signals between neurons be sped up? Is the long economic slump the new normal, or are markets still efficient? What advice can guide policymakers trying to prevent future economic meltdowns? What is the nature of life?
There were no easy questions for the 2013 American Nobel laureates at a symposium hosted at the Swedish Embassy in Washington November 19. All nine recipients—three each in chemistry, physiology or medicine, and economics—took part in a wide-ranging discussion about their discoveries and responded to audience questions.
Laureates taking part were James E. Rothman, Randy W. Schekman, and Thomas C. Südhof (physiology or medicine); Martin Karplus, Michael Levitt, and Arieh Warshel (chemistry); and Eugene Fama, Lars Peter Hansen, and Robert J. Shiller (economics). Alan Leshner, chief executive officer of the American Association for the Advancement of Science, moderated the conversation.
Economics quickly came to the fore as one attendee asked the economists how they would advise policy makers trying to identify risky financial institutions and prevent future crashes.
Hansen noted that since the financial crisis, economists facing legislative mandates have rushed to measure systemic risk without providing coherent definitions. When the moderator prompted Hansen to explain what system risk is, he replied, “That’s a good question. I often say it’s like Potter Stewart’s definition of pornography—‘you know it when you see it.’ That seems to be the standard we’re working with at the moment.”
Hansen added. “How do you measure it until you have a fully coherent model of what it is you’re measuring?”
“Systemic risk is contagion,” said Shiller. He used the example of AIG’s failures spreading financial losses within and beyond the financial sector. The Office of Financial Regulation was established to gather the data to try to analyze such risks. “Three years on, that is turning out to be a huge project; my understanding is that it’s not that far along yet,” Shiller said.
Given the difficulty of measuring risk, Hansen said, “The best hope of financial oversight in the short run is tht [regulatory] organizations are given simple and transparent things to be looking at. We should not base regulation on ill-defined concepts that open the door to discretionary policies.”
Shiller noted that the financial crisis has spawned a great deal of research, much like the Great Depression did. That led to the development of new economic measures like gross domestic product and the unemployment rate. “I think we have to go on another course of research that will take many years. I think it will help improve government policy,” Shiller said.
But Fama noted, “I think systemic risk is whatever the government says is systemic the next time we have a crisis, and everything researchers do up to then will be totally irrelevant.”
Fama stated that the crisis arose because financial institutions didn’t have enough equity to cover their losses, and called for higher capital reserves.
Are Markets Efficient?
Another questioner pointed to historic highs in the stock market while by some measures the economic slump continues, and asked, “Are efficient markets still efficient?
“Of course,” responded Fama, who coined the term early in his 50-year career at the University of Chicago Booth School of Business. He explained that efficiency means that asset prices quickly adjust to reflect all available information. The implication is that markets are inherently unpredictable
“Stock prices are high. Earnings have been very high. The market is telling us they might stay high for quite some time,” Fama noted. I don’t know any more than that. I don’t speculate about the future. I’m an empiricist. I study what the facts have told us and basically it has told us you can’t predict the future.”
Shiller said markets are “somewhat efficient.” Karplus pointed to high market volatility, with price swings that “made zero sense” to him, and wondered what we really understood about the stock market. Fama questioned the facts behind his question.
Following the Swedish Embassy forum, the laureates and their spouses attended a White House reception with President Obama.
(Teaser photo: Official White House Photo by Pete Souza) Story: Becker Friedman Institute