"Our economy is no stranger to financial crisis," said Jonathan Kirshner, Cornell professor of government and director of the Reppy Institute for Peace and Conflict Studies, at a panel discussion Oct. 11 at the Cornell Club in New York. "There have been at least 15 since the 1800s."

"What's more unusual," Kirshner said, was "the relatively long period of financial stability" earlier this century, from the 1940s to 1980s, a period he termed "boring banking, when the financial sector was heavily regulated."

He and Bob Hockett, Cornell professor of law and an expert on international finance, financial institutions and financial regulation, addressed "Money, Power and Peril: The World Economy Pre-Post Crisis"; Fred Logevall, professor of history and director of Cornell's Einaudi Center for International Studies, moderated the discussion.

"Financial markets are prone to self-reinforcing price swings," Hockett said, "and we need not assume any irrationality or inefficiency in accounting for them. "As asset prices rise rapidly for long periods, individual investors naturally buy. It would [almost seem] irrational not to … [when one can't see the end but knows it is probably distant]." However, when the asset bubble finally bursts, it can have broad economic consequences, which is what has happened since the stock market and housing crashes of the past decade.

"It's hard to tamp down asset prices once they become inflated and enter into self-fulfilling prophecy territory," Hockett said. That is the role of the Federal Reserve, he noted, which can tighten credit when the markets become overheated, but whose function is complicated by its other mandate, to ensure full employment, in times of growing trade deficits.

The economic crisis, Kirshner said, presented an opportunity for vigorous political debate about the proper size and role of the financial sector in the economy, and it also raised important long-term questions about the future of the U.S. dollar and its role in the world economy.

Hockett said there are multiple reasons for our economic troubles, but critical among them is that Bretton Woods' best ideas never were fully implemented, referring to the 1944 meeting, when delegates from 44 nations met at Bretton Woods, N.H. Their negotiations eventually resulted in the World Bank to manage post-war reconstruction and development and the International Monetary Fund to manage and periodically adjust international currency relations. But today's IMF, he noted, does not automatically adjust currency values to prevent long-term trade imbalances, as John Maynard Keynes had in mind.

"Because such imbalances today make it impossible for the Fed simultaneously to tamp down excess credit growth while maintaining full employment, a truly Keynesian IMF or some equivalent will be a prerequisite to preventing future credit bubbles as economic growth and employment return to healthy levels," Hockett said.

Many of the problems are an indirect result of mistakes and specific policies advocated by government, academic institutions and Wall Street, Kirshner said. For example, a primary culprit, he said, was deregulation, which was championed in different parts of the government by such figures as Larry Summers during the Clinton years; U.S. Sen. Phil Gramm (R-Texas), who chaired the U.S. Senate Committee on Banking and spearheaded a 1999 bill that lifted more than six decades of restrictions against banks offering commercial banking, insurance and investment services; and Alan Greenspan, former chairman of the Federal Reserve.

"I'm agnostic about whether there was a regulatory failure," commented Hockett, in response, "unless by 'regulation' you mean something very narrow -- namely, careful modulation of the credit-money supply. ... A sustainable solution, however, will have to be international."

Added Kirshner: "However, unwinding the mechanisms we've enacted to help our economy is going to be a Herculean task."

The panel discussion was sponsored by Cornell on the Road.

John Mikytuck '90 is a freelance journalist, writer and producer in New York City.