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Faculty Viewpoints

Did Culture Cause the Financial Crisis?

Nobel Laureate Robert J. Shiller says that an event on the magnitude of the 2008-2009 financial crisis has to have many causes, but he sees “the spirit of the times” as a driving force behind many of them. In a lecture at Yale SOM, he described how he sees this spirit acting in everything from Fed policy to the growth in casinos.

What happened to spark the financial crisis of 2008-2009? One could look at the ballooning housing market for clues, or at financial firms heavily leveraged and bloated from a decade of loose monetary policy. But then why did those things happen?

Robert J. Shiller, Sterling Professor of Economics at Yale, is one of the founders of the field of behavioral finance, which looks at the motivations behind financial decisions. In his lecture on the precipitating factors of the crisis in the Global Financial Crisis course, he referred to “the spirit of the times,” the combination of trends—both financial and cultural—that helped lead people to irrational, and often disastrous, choices. “Big events in history are often due to the confluence of many different factors,” he said.

Shiller was a guest in Global Financial Crisis, a new course at the Yale School of Management that is putting the crisis into a global context for students. Co-taught by Andrew Metrick, Michael H. Jordan Professor of Finance and Management, and former treasury secretary Timothy Geithner, the course surveys the causes, events, policy responses, and aftermath of the largest global financial cataclysm since the Great Depression. The goal is to study what has been called the Great Recession in such a way that students—who come from throughout the university—gain a better appreciation for the dynamics of financial crises in a modern economy.

In his talk, Shiller outlined a series of factors that he believes created the environment for very poor decisions to take root, including the loose monetary policy of a Federal Reserve chairman mistakenly fixated on deflation, the rise of gambling, and a growing reverence for business leaders. And then there’s the fact that 70 years had passed since the Great Depression, leading many to believe really bad times in the United States were over forever. “It used to be your great-grandfather would tell you how bad it was,” Shiller said. “He’s gone now and it’s fading from memory. It seems unreal.”

Geithner will deliver three lectures in the course, with Metrick leading other class sessions. Geithner’s talks are also presented under the auspices of the Arthur M. Okun Public Policy Lectures, which are sponsored by the Yale Department of Economics and honor Arthur M. Okun (1928-1980), a longtime professor of economics at Yale who is best known for the widely accepted economic principle Okun's Law.

The course will boast several prominent guest lecturers, in addition to Shiller, including John Geanakoplos, James Tobin Professor of Economics, on policy responses to the crisis, and Roberta Romano, Sterling Professor of Law, on the Dodd-Frank financial reform legislation.

Watch Andrew Metrick’s introductory lecture for Global Financial Crisis. And check back for more excerpts from the course.

Department: Faculty Viewpoints