In a recent article in The Washington Post, John Cochrane and Luigi Zingales, both from the University of Chicago Booth School of Business, wrote about the collapse of Lehman Brothers, its bail out by the Federal Reserve and the ensuing financial crisis. In the article, they argue that those who believe that the Fed should have not intervened are wrong. But not for the standard reasons, not because of its enormous costs to the government budget. Banks now, they claim, know that they will be bailed out in the future. That will fuel more irresponsible behavior, that the Fed, so far, has been uncapable to deter. "A system with so much power vested in so few people, with so few rules, in which crises are managed with 2 a.m. conference calls, cannot possibly do better," they say. Cochrane and Zingales predict that the next crisis will be so global and so systemic that no government effort will be enough to avert it. "This system cannot go on," they conclude, in an unparalleled bold statement.
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As promised - here are the rest of the photos. The prizewinners are:
Morgan Stanley came to the School of Economics today and gave out certificates and Amazon vouchers to the three best performers in each of the first and second year Economics courses and over the whole of Junior and Senior Honours last year.
Here's a photo of our Head of School greeting the visitors - I'll post more photos tomorrow.
It's an ongoing thing - see the photo on the noticeboard behind them.
Before proceeding any further, we need to define what does it mean to be rational from an economic perspective. We will say that an agent is rational if this agent takes actions that maximize his expected pay-off from the set of available actions to him, and given the beliefs that he holds about the consequences of these actions (no matter how wrong they can be). That is basically what it means to be rational. It seems a very natural, powerful and simple idea. But then, why do non-economists protest so angrily against this assumption?
In the discussion panel on the Credit crunch, organized by the Economics Society about a year ago, my colleague Sevi Rodriguez-Mora pointed out, quite rightly, that most of what we could say about the crisis was just to descibe its chronology. At that moment, it was not very clear what caused it, and to some extent, that it is still the case (many entries in this blog has focused on this topic). The recent three-part BBC documentary The Love of Money illustrates perfectly this problem. Two of its parts ("The bank that bust the world" and "Back from the brink") recount the events that preceded and followed the fall of Lehman Brothers on 15th September 2008, widely considered as the starting point of the crisis. That "journalistic" narrative is interesting to a certain extent, but ultimately unsatisfactory to any economist who wants to understand the actual causes of the crisis.
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