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Esther Duflo Said in 2008 …

… what Paul Krugman said today.


What the crisis has made bluntly apparent is that all this intelligence is not employed in a particularly productive way. Admittedly, a financial sector is necessary to act as the intermediary between entrepreneurs and investors. But the sector seems to have taken a quasi-autonomous existence without close connection with the financing requirements of the real economy. Thomas Philippon calculates that the financial sector, which accounts for 8% of GDP in 2006, is probably at least 2% above the size required by this intermediation.3 Worse, the sub-prime crisis is almost certainly in part linked to the fact the needs of the financial markets (the insatiable demand from banks for the famous “mortgage backed securities”) led to excessive borrowing and a housing bubble.

Duflo got the Clark Award today.

Margaret Soltan, April 23, 2010 8:06PM
Posted in: professors

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One Response to “Esther Duflo Said in 2008 …”

  1. david foster Says:

    There were many causes of the housing bubble/collapse, but one of them, which is particularly relevant to universities, was excessive faith in the modeling of expected performance of collateralized mortgage obligations. Old-line bankers with IQs of 110 would never have made the bets on an *individual* basis that were made on an aggregate basis by PhDs with IQs of 140 and MBAs with IQs of 130.

    MBA education, and perhaps graduate education in general, often leads to excessive faith in abstractions, whereas it *should* lead to the ability to use abstractions in a questioning and relatively safe manner.

    Peter Drucker has some relevant and eloquent thoughts, which I excerpt here. The cup sizes of bras are involved.

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