What does the word “money” mean to you in 2012? Is the definition changing as it becomes more digital?
Money is a medium of exchange and a store of value, and I think it always has been. And you know, it’s been a long, long time since most of the money was [hard] currency; most of the money has been deposits in a bank of one kind or other. I think many of the basic principles underlying money that economists understand—that if you create too much of it you will get rising prices, for example—actually are constant even as technology does change.
Do you think our financial system is broken?
I don’t think there’s any question that it was broken—otherwise we wouldn’t have had the kind of financial crisis we’ve had from 2007, which still has carry-over effects right now. I think that the new legislation enacted by Congress to reform financial regulation does represent a very far-reaching set of changes in the way money and the financial system are regulated. There’s a great deal in that regulation that was left to public authorities and that will need to be worked out over time, so I think we’re in the midst of a fairly substantial change in financial regulatory practice, and I think that’s a good thing.
I think we need a system that’s as modern as the markets. Institutions can change what they hold, they can change their risk profiles much more quickly than they used to be able to, and that means they need to be watched more quickly. It also means that we may not be able to focus quite as much on what their risk profile is at a particular instant, as we focus on what their systems are for managing risk. But there’s no question that risk management is going to be one of the growth areas for the next decade or two.
In a 2007 interview, after you left Harvard’s presidency, you said, “I want to spend this next phase [of my life] understanding the world as accurately I can, and try to think about what the implications of that understanding are.” Almost five years later, what have you learned that surprised you the most?
Well, I didn’t plan at the time on working in the U.S. government, fighting rather serious financial fires. I think I have—I think we’ve all—learned that there is more fragility to the market economy than we had perhaps appreciated, that while most of the time the economy is in a sense self-regulating like a thermostat—when there’s excess supply, a price goes down and equilibrium is restored—economies are sometimes, perhaps two or three times a century, self-dis-equilibrating, and the metaphor becomes more an avalanche than a thermostat.
And at that time, there’s a need for strong government actions, and that’s what we tried to provide in 2009. Certainly no one’s fully satisfied with how the economy is performing, but if you look at the six months from the fall of 2008 to the spring of 2009, they show deterioration on almost every economic statistic more rapid than during the Depression—the first six months after the fall of 1929. And certainly the play-out has been nothing like what it was after the spring of 1930, and that’s a reflection of the strong policies that were pursued.