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Hometown U: Nobel laureate celebrates Rasmuson Chair, talks housing bubbles

Kathleen McCoy
Philip Hall

Professor Jim Murphy's 10 a.m. econ class at UAA had a special guest Thursday: Nobel laureate Vernon Smith, founding father of experimental economics, a tool for studying how people behave in different economic situations in carefully controlled environments.

Tall and lanky in blue jeans, pink shirt and a gray suit jacket, Smith wore four showy silver Hopi Indian rings on his fingers. He's 86 years old this year. His silver blond hair is shorter now but pictures of him receiving his Nobel Prize for economics in 2002 include a long ponytail snaking down the back of his black tuxedo coat.

Smith was back on campus to celebrate the 10th anniversary of the Rasmuson Chair in Economics at the UAA College of Business and Public Policy. The chair was endowed by the late Elmer Rasmuson, Alaska banker, entrepreneur and philanthropist.

Smith was Chair No. 1. He arrived in 2003, shortly after winning his prize. At the time, people wondered if he'd still come to UAA after earning such a grand honor. He did, and his legacy lives on through a thriving experimental economics lab and a faculty busy applying its methods to Alaska problems. The field is just 50 years old, and has allowed economists to refine their understanding of human behavior in the marketplace.

Smith and co-author Steve Gjerstad are close to finishing a new book, "Rethinking Housing Bubbles," coming out next year from Cambridge University Press. Smith began writing on the topic in 2008.

His first article was titled "We Have Met the Enemy and He Is Us." Borrowing that line from the old Pogo comic, he links the 2008 collapse to the contemporary American propensity for buying houses on easy credit, otherwise known as other people's money.

"That's not the way it's done most places," he told the class. "Usually, people rent for years, saving up so they can buy more of the house with their own money."

Smith calls himself "a libertarian with reservations." He laughs when he recounts that The Wall Street Journal used the very same essay but changed the title to "The Clinton Housing Bubble."

In their upcoming book, Smith and Gjerstad profile the 14 recessions in U.S. history, from the Great Depression of 1929 to the Great Recession of 2008. He shared some of their findings with students in Murphy's class.

In both bookend events, major housing bubbles -- launched by free or cheap mortgages -- came before the big crash.

In the 1920s, inflation control after World War I fueled investment in real estate. Government programs and popular culture emphasized home ownership. Better Homes and Gardens, a magazine founded in 1922, took its name from a public policy initiative, the Better Homes Movement. Warren Harding, Calvin Coolidge and Herbert Hoover all ran campaigns to encourage home ownership.

This time around, with support across the political spectrum, the Taxpayer Relief Act of 1997 exempted from taxation home sale profits up to $500,000. That started a run-up in housing prices that grabbed everybody's attention; remember the term "flipping houses"? Bankers, real estate agents, builders, buyers, sellers -- everyone -- believed housing prices would just continue to go up.

"If you were a banking regulator in 2003 and declared that the bubble would burst, I doubt you could have kept your job," Smith quipped.

The difference between the two events is recovery. After the Great Depression, markets came rocketing back.

"By 1934, the GDP growth was 7.7 percent," he said. But this month's GDP growth was just 2.8 percent. "We can't seem to get unstuck."

Why? Because we haven't yet dealt with consumer debt. Banks are protecting their existing investors by resisting the reforms needed to encourage new investment. Doing so protects the old guard but delays the recovery. Japan did the same thing, Smith said, and effectively extended its long, slow recovery to two decades.

Sweden, on the other hand, let institutions fail and put the problem behind them. Smith advises doing the same thing.

"Citi Bank, Bank of America, J.P. Morgan, they should all go through bankruptcy and have their assets remarked to the market. They'd get auctioned off and no one would pay more than market value. Then you'd start again with clean balance sheets."

Smith would argue our economy won't get better unless and until we face the music.

He lived through the Great Depression. He was just 5 years old when his machinist father moved the whole family from the city back to a family farm.

"You see those migrations in bad times because on a farm, you can grow your own food. You can eat."

I asked Smith if he was an optimist or a pessimist. His grin came easily. "I was born an optimist. We are very resilient in this country. It's amazing the beatings we can take and still survive."

Kathleen McCoy works at UAA, where she highlights campus life through social and online media.

 


By KATHLEEN McCOY
Hometown U