evening with Robert C. Merton, Nobel laureate

Tonight NYU hosted Robert C. Merton, recipient of the 1997 Nobel prize in economics, for a discussion of the recent financial crisis.  Merton is currently a professor at the Harvard Business School and spoke on behalf of the Institute for Public Knowledge.

The majority of Merton's presentation was his analysis of the origin of the financial crisis of the past two years.  He argued that three forces, which alone are harmless if not beneficial to the economy, came together in such a way that created the systemic risk to bring down the financial system.  These three forces  were the steady rise in U.S. home prices, falling U.S. interest rates, and the increased efficiency of mortgage refinancing.  This is a contradiction to the common belief that the crisis was a product of unethical or incompetent behavior on Wall Street.  Merton believes that since these three trends occurred at the same time they created an "unintended synchronization of homeowner leverage" in which every refinanced mortgage was taken out at the highest possible value of the home.  When home prices began to decline, everyone suffered rather than just those with new mortgages and not those individuals with mortgages valued at below current prices had there been no refinanced mortgages.

Robert Merton at NYU