The school of financial crises

Something really smart is happening at the Yale School of Management.

They’re training people to fight a financial crisis.

(Editor’s note: You, too, can take some of this training, at no cost. See The Global Financial Crisis Project below.)

After 10 years of trying to figure out how to prevent the next upheaval, no one can say with confidence that financial markets are stable.  So maybe we need some people who will know what to do when the next crisis hits?

“The first time you contemplate a potential solution to a crisis shouldn’t be when you’re in the middle of one. Collectively, we must be better prepared for the next crisis,” Yale professor Andrew Metrick said in a prepared statement.  Metrick founded and heads the program.

This is good news for RepoWatch readers, because the people running this Yale Program on Financial Stability actually do know what happened during the Global Financial Crisis of 2008.

Metrick is a frequent co-author with Yale professor Gary Gorton on studies that explain the run on repo, and Gorton himself has a leadership role in Metrick’s financial stability program.

Although Metrick founded Yale’s Program on Financial Stability four years ago, this year he’s launching an ambitious leap forward thanks to a $10 million grant in May from influential leaders including billionaires Bill Gates and Jeff Bezos, Bloomberg Philanthropies and the Peter G. Peterson Foundation.

To guide the expanded effort, Metrick recently added former Federal Reserve Chairman Ben Bernanke,  former Treasury Secretary Hank Paulson, internationally known economist Kenneth Rogoff and others to his Advisory Board, which is headed by former Treasury Secretary Timothy Geithner.

“Our goal is to improve the quality of decision making by governments and central banks in financial crises,” Geithner said in a statement.

Metrick notes that Lombard Street by Walter Bagehot, written in 1873 , is still the guide that economists turn to in times of financial stress.

From Metrick’s program materials:

Bagehot’s advice for central bankers in a crisis can be summarized as “lend freely at a penalty rate to solvent institutions presenting good collateral.”  This advice is still considered near-gospel by many central bankers, but its practicality to our financial system almost 150 years later is insufficient to guide complex policy actions.

Here are the key initiatives of the Yale Program on Financial Stability:

The Systemic Risk Institute: Annually this institute puts on three major events:  A two-week workshop for a small group of economists who work at regulatory agencies and central banks,  a three-day meeting focused on crisis-fighting tools for senior policymakers and a one-day academic conference on “Fighting a financial crisis.”

This year’s one-day conference, with academic papers, is organized by Metrick and Gorton and is being held today at Yale University. Agendas for past conferences are posted here.

The New Bagehot Crisis-Response Project: This project compiles detailed case studies of specific crisis interventions and uses them to identify and promote best practices.

The Global Financial Crisis Project: This project aims to make the Global Financial Crisis “intelligible to as many people as possible,” through on-campus and online learning. It costs $49 a month for 11 weeks of study.  Students can take as much time as they need. They may audit the course for free.

The Financial Crises Archives Project: This project develops resources for scholars of financial crises, including an annotated bibliography of academic papers on the topic.

A Master of Management Studies in Systemic Risk:  This program includes nine courses on subjects like systemic risk, central banking, the Global Financial Crisis and capital markets, taught by Gorton, Geithner, Metrick and others.