Question: To what extent is this a liquidity crisis, and to what extent do you think it is a solvency crisis? (Arnold Kling, Econlog)
Glenn Hubbard: I think there were pockets of liquidity crises to be sure, but by and large, this was a solvency crisis. We got into trouble here; I think the crisis was about a four-letter word, R-I-S-K. It was a mispricing of risks and I think this led to very substantial capital losses in the financial system, and those were real losses. Liquidity wasn’t going to pay for all of those loses, and we had to come to grips with that. I think that public policy contributed to the problem going into the crisis unfortunately. But I think now we’re of the realization that we do have a solvency problem and we have to find an exit now.
Question: What accounting standards that should be in place when firms value assets on their balance sheets? (Mark Thoma, Economist’s View)
Glenn Hubbard: Well, I think this word, Sarbanes-Oxley did well was to focus managerial attention on accounting, yet frankly in the post-Sarbanes-Oxley period, we’ve seen spectacular failure. So, it’s not getting people to dot I’s, and cross T’s, isn’t enough. We really need to think about risk management. The area the I think was not treated well enough in Sarbanes-Oxley is the whole idea of enterprise risk management, whether you’re a financial institution or a non-financial institution, does the leadership of the firm, does the board of directors really understand where the risks are buried in the firm. I think in some of the recent failures, the answer to that question might well be, no.
Question: Did the efficient markets hypothesis encourage students to be blind to the risk of a major housing crash? (Scott Sumner, The Money Illusion)
Glenn Hubbard: I come from Columbia where we have a whole franchise teaching alternatives to the Efficient Market Hypothesis. Our students are a little bit different. They come up with behavioral approaches, value investing, efficient markets is just one thing. I think that there was a tendency by many policymakers and business people to think that market prices must be better than any available alternative. I think that there is clearly a need to look at bubbles. I don’t think you can just wait until just after the fact and say, oh my gosh, that was a bubble, let’s clean it up. The housing bubble was quite clearly a bubble. I think it was noticed by a lot of people, it was noticed in real time, and it does raise clear policy concerns.
Question: Will the Fed's efforts to negotiate for itself a central regulatory role may lead it to accept ill-advised oversight of its monetary policymaking operations? (Ryan Avent, The Economist’s Free Exchange)
Glenn Hubbard: I’m concerned about the politicization of the Fed. The Fed has been, and is, a great institution as a central bank, both in conducting monetary policy and also in being a great lender of last resort. I worry that drawing the Fed too much into financial regulatory battles puts it squarely in politics. That’s clearly an area where Congress should have and does have opinions. I think and the committee on capital markets regulation that I’m part of has issued an opinion that having an umbrella financial services agency much like the United Kingdom or Japan makes much more sense for overall financial regulation and let the Feds stick to monetary policy.
Question: Should governments encourage home ownership?
Glenn Hubbard: Well, I’ve always been sort of the odd-man-out in Washington on this. I don’t particularly think we should be encouraging home ownership. Neither do I think we should discourage home ownership. It seems to me that’s an economic decision for each individual to make. As a factual matter, if you look at the public policies that we’ve taken to encourage home ownership, mortgage interest deduction, direct credit interventions, and so on, there’s very little evidence that suggest that we actually have higher homeownership rates than some countries that don’t have a mortgage interest deduction. For example, our northern neighbor in Canada. So, I’m not sure that it’s worth the candle and we know that what we’ve put in through Fannie Mae and Freddie Mac has led to very large exposures to tax payers. So, I think this is a question we really have to come to grips with. I at least don’t think there’s a moral superiority to homeownership. I live that because I rent.
Recorded on December 17, 2009
