What Went Wrong?
Understanding the financial crisis is a real challenge
Until recently, I thought of myself as a fairly well-informed observer of this country’s financial marketplace. In years past, I wrote about personal finance for a business magazine. I keep up with business news. And I’m no stranger to the type of investment decisions made by millions of Americans, from securing mortgages to saving for kids’ college tuition and retirement.
But the country’s current financial crisis really threw me for a loop. Beginning last spring, with the demise of Bear Stearns, the steady drip, drip, drip of bad news on the financial front picked up intensity. And I found myself straining to understand not just what was happening but the strange vocabulary used to describe it. I’d never heard of a subprime mortgage. Likewise securitization in all its exotic flavors: collateralized debt obligations, structured investment vehicles, and credit default swaps.
As the drip, drip of bad news increased to a steady stream in late summer, I finally decided to go beyond the disaster-of-the-day news stories and bought four new books on the financial crisis. Alas, becoming conversant with the arcane financial engineering that got us into this mess hasn’t made me feel any better. Just the opposite.
By late September, as the bad financial news all but drowned out the presidential campaign, what once appeared to be a Wall Street problem clearly had metastasized to a Main Street problem. Americans began to worry about the safety of their savings and investments. Calling a Hail Mary play, the administration dramatically proposed a $700 billion financial rescue plan to restore confidence in the markets.
Against that backdrop of heightened national anxiety, HBS and Harvard University hastily organized three separate panels of academic experts during the week of September 22 to talk about what was going on, what could be done, and where things were headed. Given the historic nature of the financial crisis, we decided to print excerpts from the panels.
HBS Dean Jay Light spoke at all three sessions, giving an overview of how we got into this mess and outlining a process for getting out. An expert on finance and a director of the Harvard Management Company, Light opened his remarks with this analogy:
“The past year and a half or so has been a slow-motion train wreck. About every three months or so, another car piled into what had been the existing wreck. But it was pretty slow, and there was lots of time to think about it. What’s happened in the last two weeks is that you can drop the words ‘slow motion.’ It’s just a plain train wreck now, as the cars collide one on another.”
The wreck, Light continued, was caused by “the collision of a collapsing housing bubble and a new, but untested, financial system,” one that has proven to be unexpectedly fragile in a way that nobody really understood.
If, like me, you’re still trying to understand how we got here and what’s to be done, the views we have drawn from the panels will give you lots to ponder. If you want to dig deeper, visit the School’s new Web site that compiles news articles and videos featuring comments by HBS faculty on the global economic crisis: www.hbs.edu/economic-crisis/.
