Andrew Metrick, the Janet L. Yellen Professor of Finance and Management and the director of the Yale Program on Financial Stability (YPFS), and Robert Shiller, the Sterling Professor of Economics and professor of finance, were guests of Yale President Peter Salovey on an episode of the Yale Talk podcast released on June 3.
Yale Talk: Conversations with President Peter Salovey is a monthly podcast featuring discussions with students, alumni, faculty, and staff. The June 3 episode, which also included Pinelopi Goldberg, the Elihu Professor of Economics, was titled “Yale Economic Experts on the COVID-19 Pandemic.”
Metrick’s team at YPFS has spent years gathering information about the response to the 2007–2008 financial crisis and is now tracking the response to COVID-19. He told Salovey that policymakers are making good use of historical lessons. “In the earliest stages of this crisis, there was a really strong reaction from central banks around the world, most notable the Federal Reserve in the United States, that took tools out of our toolbox that had been discovered and built in 2007–2008 and just applied them,” he said. “The liquidity tools that were used were extremely effective in the early stages of the crisis and managed to calm financial markets down from their initial concerns.”
But, Metrick said, there may be dangers ahead for the financial system: “I am concerned that if this recession lasts as long as many people fear, the banks and the financial system more broadly, which is very well capitalized right now, will cease to be well capitalized, that some of the burden of helping to rescue the economy, which is falling on the banks, will lead them to end up quite undercapitalized sometime around the end of 2020, and if that happens, I don’t know if we are prepared yet.”
Shiller, whose most recent book is Narrative Economics, discussed how shared narratives affect economic behavior and described the narratives that formed around the Spanish flu pandemic of 1918-19, the depression of 1920-21, and the Great Depression. The book, he said, is “really a research proposal and not a final statement. I think it will be a new world for macroeconomics.”
Like a virus, Shiller said, a narrative can lie dormant until circumstances make it newly potent. “Some of the narratives that are really salient now preceded the COVID-19 epidemic and actually made it worse,” he said. “Among many people in this country, there is a fear of the deep state, of liberal bias. The epidemic has amplified them and left us in in a difficult situation.”
Listen to the conversation: