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John Harvard's Journal

Financial Crises, Faculty Views

November-December 2008

Amid the crises besetting U.S. financial institutions, faculty panels convened on September 23 at Harvard Business School (HBS) and two days later in Sanders Theatre to address the roots of the problem and potential solutions. Among the salient points:

  • Leverage, liquidity, transparency. HBS dean Jay Light talked about the need for fundamental reform of both regulatory oversight and the operating standards for commercial and investment banks—and their use of new kinds of investment instruments.
  • Moral hazard. McLean professor of business administration David Moss, author of When All Else Fails: Government as the Ultimate Risk Manager, emphasized the importance of balancing any federally financed rescue plan with offsetting measures to discourage inappropriate, even dangerous, risk-taking in the future.
  • Real losses. McArthur University Professor Robert Merton noted that, beyond immediate problems of liquidity and scarce credit, the underlying deflation of house prices had caused a permanent loss of perhaps $4 trillion of actual wealth to date.
  • Middle-class stress. Professor of management practice Robert Kaplan—a Goldman Sachs alumnus who served as interim head of Harvard Management Company (HMC) in late 2007 and the first half of 2008—looked beyond the immediate crisis to focus on the “severely weakened middle class in the United States” as the core economic problem.
  • Reduced global status. Cabot professor of public policy Kenneth Rogoff, former chief economist of the International Monetary Fund, said the financial sector as a whole was “bloated” and had to shrink. Given the “spectacular deficits” being run by the U.S. economy, he warned, Americans could not fund the repair of their own financial system, painting policymakers into a corner: “We borrowed too much, we screwed up, so we’re going to fix it by borrowing more.”

Not present was Mohamed El-Erian, who left his position as HMC president late in 2007 to return to PIMCO, the huge fixed-income investment-management firm. But the book he completed during his brief HMC tenure and published this spring—When Markets Collide: Investment Strategies for the Age of Global Economic Change—serves as a useful guide to contemporary financial terminology and the sorts of diversified strategies the endowment’s managers employ (and individuals might emulate) as they navigate perilous markets.