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Who’s to Blame for the Financial Crisis?
David Wessel is economics editor for The Wall Street Journal and writes the Capital column, a weekly look at the economy and forces shaping living standards around the world. He is responsible for overseeing coverage of the Fed and the Journal’s daily coverage of the macro economy, global trade and economic trends. He appears frequently on National Public Radio.
His book, “In Fed We Trust: Ben Bernanke’s War on the Great Panic,” was published August 4, 2009.
Previously, Mr. Wessel was deputy bureau chief of The Wall Street Journal's Washington bureau. David joined The Wall Street Journal in 1984 in Boston, and moved to Washington in 1987. In 1999 and 2000, he served as the newspaper’s Berlin bureau chief.
He previously worked for the Boston Globe, the Hartford (Conn.) Courant and Middletown (Conn.) Press. A 1975 graduate of Haverford College, he was Knight Bagehot Fellow in Business & Economics Journalism at Columbia University in 1980-81.
David has shared two Pulitzer Prizes, one for Boston Globe stories in 1983 on the persistence of racism in Boston and the other for stories in The Wall Street Journal in 2002 on corporate wrong-doing. He is the co-author, with Wall Street Journal reporter Bob Davis, of Prosperity, a 1998 book on the American middle class.
Question: Who is most culpable for the crisis, Washington or Wall Street?
David Wessel: I think one of the extraordinary things about this crisis is the list of culprits. Almost no check on the financial system worked. The Bank Risk Management Committees didn't manage risk, the credit rating agencies stamped triple A, Gold Plated status on things that weren't, people made mortgages to people who couldn't pay them back, people got mortgages that couldn't pay them, the regulators were asleep, the financial press did a lousy job even though they tried to call attention to some of the excesses. But while some aspects of the crisis were made in Washington, I think this one really falls more squarely on Wall Street.
This crisis had its roots in an attitude that Washington should get out of Wall Street's way and just let Wall Street do its thing: innovate, and make the world better for us while making a lot of money for them, and that turned out to be a mistake.
Question: Who was responsible for the asset bubble that formed?
David Wessel: As you know, there’s a big argument there. What was the root cause of the bubble? Was it that the Asian economies were saving so much money that they flooded the world with liquidity and as a result everybody that wanted to borrow could borrow whether or not they had something good to do with the money? Or was it the monetary policy of the United States, the Federal Reserve, and some of the other central banks that kept rates artificially low, and that triggered the asset bubble and the borrowing binge?
I think clearly, both played a role. Ben Bernanke, when he was a member of the Federal Reserve Board, blamed very much the savings glut, and I think that underplays the role that the Fed actually played. So, I don’t think that the Fed was wrong, that the savings glut didn’t exist, but I don’t think the that the Fed did everything it could, particularly with its regulatory arm, to prevent the savings glut from turning into a credit bubble.
I think what we’ve learned is quite clear. The Federal Reserve used to believe, and they were explicit about it, that they could not and should not do anything to prick an asset bubble, stock prices, housing prices you name it. Instead, they should wait until a stock or asset bubble of some kind burst and only after it burst should they get into the act and that would be the mop up strategy. The only caveat was that if asset prices were somehow spilling over into the prices of goods and services, then maybe there was a case for the Fed to raise interest rates.
But Ben Bernanke himself had said that that view needs to be re-examined as a result of this devastating recession caused by the bursting of the housing and credit bubble. So I think, right now, there’s a lot of ferment inside the Federal Reserve and there will be continued ferment until they are faced with this choice again, what to do about something that looks to a lot of people like an asset bubble, they will be more inclined to act than they would have ten years ago because of this crisis. It may not be an increase in interest rates. It may be using the regulatory or supervisory power to kind of lean on the bankers to stop lending so much. It may be actually forbidding certain practices. They could have been much more aggressive in forbidding sub-prime mortgages, for instance. But the world will never be the same as it was in 1999.
Question: How should officials address Chinese currency interventions?
David Wessel: Well, the world economy is unbalanced, and this imbalance is both partly responsible for the crisis and is hurting the recovery from the crisis. The fundamental problem is that the United States saves too little, and borrows too much; most of it from Asia, and Asia, particularly China, saves too much and relies too much on sending that savings to the United States instead of using that money to buy stuff from us.
So, this imbalance, they save too much and we don’t save enough, has to end for the world to get on with the business of widely shared prosperity. One way in our system that that happens is through exchange rates because when the dollar falls and another currency rises, that makes imports more expensive to Americans and it makes our exports more attractive to foreigners. In almost every country in the world now of any size, the currencies are moving around with the markets. The Chinese are a notable exception. The may be something that they think is in their interest, but from what I sit, it’s slowing the process of readjustment and rebalancing the world economy and is not doing the world any favors even though it may be very popular with the Chinese exporters.
Question: Is there anything that American policymakers ought to be asking the Chinese?
David Wessel: The problem is that the Chinese are not going to do things because America wants them to. They are going to do things because they are convinced they are in their self-interest and the Chinese learned a lesson from Asian financial crisis, which is when exchange rates are very flexible they can move down very fast and cause a calamity. And had learned a big thing from the recent crisis, which is the Americans don’t know quite so much about finances they pretended. “The teacher has become the pupil,” one of the Chinese officials said to an American official.
As a result, the U.S. doesn’t have much credibility with the Chinese and we can trot out 50 economists who tell them this is in their interest and they’ll look back and see that none of those economists predicted the great panic that we just lived through. I think in the end, what will happen is, that other Asian countries whose currencies float against the Dollar will pressure the Chinese because it makes it difficult for them to export if the Chinese currency is not rising against the Dollar and the Thai Baht, and the Indonesian Rupiah are rising that gives the Chinese an unfair advantage, these countries say. And eventually the Chinese will realize that they are creating a lot of strains in their own system by holding the Chinese wheel arm low and they’ll adjust. They’re getting a lot of pressure from the IMF, from the World Bank. So, I think it will only happen when they are convinced it’s in their interest and one way that is likely to happen is not through pressure from the United States, but more from pressure from other people.
Recorded on November 20, 2009
David Wessel sees a long list of culprits, from the credit rating agencies to financial press—but puts the majority of the blame on Wall Street. This series was made possible by the Charles G. Koch Charitable Foundation.
What conditions of the new normal were already appreciated widely?<p>First, we understand that higher education is unique among industries. Some industries are governed by markets. Others are run by governments. Most operate under the influence of both markets and governments. And then there's higher education. Higher education as an "industry" involves public, private, and for-profit universities operating at small, medium, large, and now massive scales. Some higher education industry actors are intense specialists; others are adept generalists. Some are fantastically wealthy; others are tragically poor. Some are embedded in large cities; others are carefully situated near farms and frontiers.</p> <p>These differences demonstrate just some of the complexities that shape higher education. Still, we understand that change in the industry is underway, and we must be active in directing it. Yet because of higher education's unique (and sometimes vexing) operational and structural conditions, many of the lessons from change management and the science of industrial transformation are only applicable in limited or highly modified ways. For evidence of this, one can look at various perspectives, including those that we have offered, on such topics as <a href="https://www.insidehighered.com/digital-learning/blogs/rethinking-higher-education/lessons-disruption" target="_blank">disruption</a>, <a href="https://www.nytimes.com/2020/02/20/education/learning/education-technology.html" target="_blank">technology management</a>, and so-called "<a href="https://www.insidehighered.com/sites/default/server_files/media/Excerpt_IHESpecialReport_Growing-Role-of-Mergers-in-Higher-Ed.pdf" target="_blank">mergers and acquisitions</a>" in higher education. In each of these spaces, the "market forces" and "market rules" for higher education are different than they are in business, or even in government. This has always been the case and it is made more obvious by COVID-19.</p> <p>Second, with so much excitement about innovation in higher education, we sometimes lose sight of the fact that students are—and should remain—the core cause for innovation. Higher education's capacity to absorb new ideas is strong. But the ideas that endure are those designed to benefit students, and therefore society. This is important to remember because not all innovations are designed with students in mind. The recent history of innovation in higher education includes several cautionary tales of what can happen when institutional interests—or worse, <a href="https://www.insidehighered.com/news/2016/02/09/apollos-new-owners-seek-fresh-start-beleaguered-company" target="_blank">shareholder</a> interests—are placed above student well-being.</p>
Photo: Getty Images<p>Third, it is abundantly apparent that universities must leverage technology to increase educational quality and access. The rapid shift to delivering an education that complies with social distancing guidelines speaks volumes about the adaptability of higher education institutions, but this transition has also posed unique difficulties for colleges and universities that had been slow to adopt digital education. The last decade has shown that online education, implemented effectively, can meet or even surpass the quality of in-person <a href="https://link-springer-com.ezproxy1.lib.asu.edu/article/10.1007/s10639-019-10027-z" target="_blank">instruction</a>.</p><p>Digital instruction, broadly defined, leverages online capabilities and integrates adaptive learning methodologies, predictive analytics, and innovations in instructional design to enable increased student engagement, personalized learning experiences, and improved learning outcomes. The ability of these technologies to transcend geographic barriers and to shrink the marginal cost of educating additional students makes them essential for delivering education at scale.</p><p>As a bonus, and it is no small thing given that they are the core cause for innovation, students embrace and enjoy digital instruction. It is their preference to learn in a format that leverages technology. This should not be a surprise; it is now how we live in all facets of life.</p><p>Still, we have only barely begun to conceive of the impact digital education will have. For example, emerging virtual and augmented reality technologies that facilitate interactive, hands-on learning will transform the way that learners acquire and apply new knowledge. Technology-enabled learning cannot replace the traditional college experience or ensure the survival of any specific college, but it can enhance student learning outcomes at scale. This has always been the case, and it is made more obvious by COVID-19.</p>
What conditions of the new normal were emerging suspicions?<p>Our collective thinking about the role of institutional or university-to-university collaboration and networking has benefitted from a new clarity in light of COVID-19. We now recognize more than ever that colleges and universities must work together to ensure that the American higher education system is resilient and sufficiently robust to meet the needs of students and their families.</p> <p>In recent weeks, various commentators have suggested that higher education will face a wave of institutional <a href="https://www.businessinsider.com/scott-galloway-predicts-colleges-will-close-due-to-pandemic-2020-5" target="_blank">closures</a> and consolidations and that large institutions with significant online instruction capacity will become dominant.</p> <p>While ASU is the largest public university in the United States by enrollment and among the most well-equipped in online education, we strongly oppose "let them fail" mindsets. The strength of American higher education relies on its institutional diversity, and on the ability of colleges and universities to meet the needs of their local communities and educate local students. The needs of learners are highly individualized, demanding a wide range of options to accommodate the aspirations and learning styles of every kind of student. Education will become less relevant and meaningful to students, and less responsive to local needs, if institutions of higher learning are allowed to fail. </p> <p>Preventing this outcome demands that colleges and universities work together to establish greater capacity for remote, distributed education. This will help institutions with fewer resources adapt to our new normal and continue to fulfill their mission of serving students, their families, and their communities. Many had suspected that collaboration and networking were preferable over letting vulnerable colleges fail. COVID-19's new normal seems to be confirming this.</p>
Photo by Joshua Lott/Getty Images<p>A second condition of the new normal that many had suspected to be true in recent years is the limited role that any one university or type of university can play as an exemplar to universities more broadly. For decades, the evolution of higher education has been shaped by the widespread imitation of a small number of elite universities. Most public research universities could benefit from replicating Berkeley or Michigan. Most small private colleges did well by replicating Williams or Swarthmore. And all universities paid close attention to Harvard, Princeton, MIT, Stanford, and Yale. It is not an exaggeration to say that the logic of replication has guided the evolution of higher education for centuries, both in the US and abroad.</p><p>Only recently have we been able to move beyond replication to new strategies of change, and COVID-19 has confirmed the legitimacy of doing so. For example, cases such as <a href="https://www.washingtonpost.com/education/2020/03/10/harvard-moves-classes-online-advises-students-stay-home-after-spring-break-response-covid-19/" target="_blank">Harvard's</a> eviction of students over the course of less than one week or <a href="https://www.nhregister.com/news/coronavirus/article/Mayor-New-Haven-asks-for-coronavirus-help-Yale-15162606.php" target="_blank">Yale's apparent reluctance</a> to work with the city of New Haven, highlight that even higher education's legacy gold standards have limits and weaknesses. We are hopeful that the new normal will include a more active and earnest recognition that we need many types of universities. We think the new normal invites us to rethink the very nature of "gold standards" for higher education.</p>
A graduate student protests MIT's rejection of some evacuation exemption requests.
Photo: Maddie Meyer/Getty Images<p>Finally, and perhaps most importantly, we had started to suspect and now understand that America's colleges and universities are among the many institutions of democracy and civil society that are, by their very design, incapable of being sufficiently responsive to the full spectrum of modern challenges and opportunities they face. Far too many higher education outcomes are determined by a student's family income, and in the context of COVID-19 this means that lower-income students, first-generation students and students of color will be disproportionately afflicted. And without new designs, we can expect postsecondary success for these same students to be as elusive in the new normal, as it was in the <a href="http://pellinstitute.org/indicators/reports_2019.shtml" target="_blank">old normal</a>. This is not just because some universities fail to sufficiently recognize and engage the promise of diversity, this is because few universities have been designed from the outset to effectively serve the unique needs of lower-income students, first-generation students and students of color.</p>
Where can the new normal take us?<p>As colleges and universities face the difficult realities of adapting to COVID-19, they also face an opportunity to rethink their operations and designs in order to respond to social needs with greater agility, adopt technology that enables education to be delivered at scale, and collaborate with each other in order to maintain the dynamism and resilience of the American higher education system.</p> <p>COVID-19 raises questions about the relevance, the quality, and the accessibility of higher education—and these are the same challenges higher education has been grappling with for years. </p> <p>ASU has been able to rapidly adapt to the present circumstances because we have spent nearly two decades not just anticipating but <em>driving</em> innovation in higher education. We have adopted a <a href="https://www.asu.edu/about/charter-mission-and-values" target="_blank">charter</a> that formalizes our definition of success in terms of "who we include and how they succeed" rather than "<a href="https://www.washingtonpost.com/opinions/2019/10/17/forget-varsity-blues-madness-lets-talk-about-students-who-cant-afford-college/" target="_blank">who we exclude</a>." We adopted an entrepreneurial <a href="https://president.asu.edu/read/higher-logic" target="_blank">operating model</a> that moves at the speed of technological and social change. We have launched initiatives such as <a href="https://www.instride.com/how-it-works/" target="_blank">InStride</a>, a platform for delivering continuing education to learners already in the workforce. We developed our own robust technological capabilities in ASU <a href="https://edplus.asu.edu/" target="_blank">EdPlus</a>, a hub for research and development in digital learning that, even before the current crisis, allowed us to serve more than 45,000 fully online students. We have also created partnerships with other forward-thinking institutions in order to mutually strengthen our capabilities for educational accessibility and quality; this includes our role in co-founding the <a href="https://theuia.org/" target="_blank">University Innovation Alliance</a>, a consortium of 11 public research universities that share data and resources to serve students at scale. </p> <p>For ASU, and universities like ASU, the "new normal" of a post-COVID world looks surprisingly like the world we already knew was necessary. Our record breaking summer 2020 <a href="https://asunow.asu.edu/20200519-sun-devil-life-summer-enrollment-sets-asu-record" target="_blank">enrollment</a> speaks to this. What COVID demonstrates is that we were already headed in the right direction and necessitates that we continue forward with new intensity and, we hope, with more partners. In fact, rather than "new normal" we might just say, it's "go time." </p>
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