Though most economic booms tend to be followed by busts, they aren’t all bad, a Nobel Prize winner in Economics said at Fordham University on March 26.
“I liked the boom during the second half of the 1990s because it was led by the internet revolution,” said Edmund Phelps, Ph.D., the McVickar Professor of Political Economy at Columbia University, “but this most recent mortgage boom (of the 2000s) seems to have been driven by an outbreak of lending coming from the financial center. It is an example of malinvestment and it’s ramifications.”
Phelps, the featured speaker for the Department of Economics’ Distinguished Lecture Series, discussed the theories of Friedrich Hayek, one of the most prominent economists of the 20th century. The Austrian-born economist’s research on the natural rate of interest and unemployment could lend insight into what is occurring in today’s economy.
“We’re at the end of a Hayekian boom and wonder if we’re going to hit a Hayekian slump,” said Phelps, the 2006 Nobel Prize winner in Economics.
Hayek argued that the upheavals in a boom may change the natural rate of interest, and left unelevated, failure by the central bank to raise its interest rate correspondingly would cause inflation to begin rising, Phelps said.
“Something like that may be happening now,” he said.
As for what can be done to prevent such a mortgage lending crisis from ever happening again, Phelps said he’s not sure tightening of regulations is the way to go.
“The short answer is we need a huge improvement in corporate governance,” he said. “Shareholders need to make better choices in selecting managers and there needs to be better incentive pay arrangements so that loan officers don’t go off on a lending tangent.”
Phelps, who directs the Center on Capitalism and Society at the Earth Institute at Columbia University, was awarded the Sviriges Riksbank Prize in Economic Sciences for his analysis of intertemporal tradeoffs in macroeconomic policy in 2006.