Getting the Best out of the Quiet Student

Earlier this month, Melissa Thomas-Hunt and I convened another session in our faculty series on case teaching.  This was focused on “Getting the Best out of the Quiet Student.”  Here’s a sketch of what we discussed. 


At the outset, we took a poll of the colleagues gathered in the room:

What is the breadth of student participation in your course on any given day?  [Pretty uneven.  A few students talk readily; the majority of students contribute a little; a few students are silent.]

Who would like to see more class participation? [Virtually all hands went up.]

Among LPs, UPs, and Fs, how significant to the result was the contribution of class participation? [General agreement: pretty significant.]

Are you an introvert? [Some faculty members had taken the Myers-Briggs personality inventory test and rated as introverts.  Such a result is typical for academicians.]

Some people gain energy from interaction with other people—these are called extroverts.  On the other hand, people who turn inward for energy are introverts.  In her book Quiet: The Power of Introverts in a World That Can’t Stop Talking, Susan Cain discusses the important contributions that a quiet person makes.  And she reserves some trenchant comments for higher education in general and business schools in particular.  Her TED talk on YouTube, “The Power of Introverts,” gives a sampling. 


Why “quiet?”


Students can be quiet for many reasons.  It is a mistake to assume that the quiet student is disinterested or unprepared for class.  Illness or lack of sleep would render anyone less engaged in classroom discussion.  Cultural background may explain some quiet students: certain cultures instill great deference to the teacher and discourage the student from questioning or inserting personal opinions in class.  Or maybe the school or section has a strong in-group that sets up a “cool culture,” in which students hoping to belong won’t violate: in one culture there is a saying that “the nail that sticks out gets hammered.” 


Susan Cain notes three classic profiles of the quiet student: a) the introvert who thinks before speaking; b) the shy student who fears humiliation in front of others; and c) the hyper-sensitive student who pays acute attention to everything and simply can’t process all the data fast enough.  It is easy to think of other possible profiles, too.  The important point is that students differ; they are not homogeneous: one size does not fit all. 


If teachers want to succeed in developing their students, it’s important to learn something about why an individual student is quiet.  Some actions recommended by our colleagues were:

Check the context.  Is there a “cool culture” prevailing in the section or at the school that could discourage outsiders from participating?  Is a virus going around?  Did the students just get exam or recruiting results back?  Is now the toughest part of the course? Anyway, are all the students unusually quiet in your class?

Check the history.  Is there something in the student’s background that might discourage class participation? 

Triangulate.  Is that student quiet in other courses too?  Is he or she generally reclusive or isolated?

Ask the student.  It could be as simple as greeting a student in the hallway and asking, “How is it going? “ or saying “We would love to hear more from you.”  A practice of some instructors is to send all students a mid-course participation feedback and to request a meeting with those students who have participated least–letting the student know where he or she stands in class has the benefits of transparency and motivation.  Of course, requesting a formal meeting with a quiet-because-fearful student might serve to amplify such fears.  Go easy, at first.

Check your own assumptions.  Be careful about framing any of this diagnostic information in a way that tilts the conclusions consistent with an implicit bias.  The answer to “Why quiet?” is usually more complicated than a stereotype might allow.

Anyway, why do we call on students in class?


This last point triggered an extended discussion about the purpose of calling on a student, especially “cold-calling.”  We pondered whether we do a disservice to our students by curating classroom discussions in a way that overvalues extroversion?  Are we discouraging “quiet” leaders who bring significant value in business?  Many of us like to teach by the case method because doing so helps to model leadership, the ability to draw ideas and action plans out of a diverse group—the Latin root for the word, “educate,” is “educe,” which means to “lead out.”  Drawing the best out of people through conversation is fundamental to leadership.  Therefore, we call on students in class to model and exercise leadership.  Our calling has many purposes:

Motivates and sets expectations.  No free-riding or passive resistance.  The student is a member of our classroom community and is obliged to contribute to the success of the whole enterprise.  Everyone owns the outcome, not just the teacher.  Calling can nudge the student into higher levels of participation.  Participating in a business discussion is a learned skill, which may not come naturally.  Do all students want to stick their necks out?  Probably not.

Evaluates.  The teacher might call on a student to check what the student knows or is thinking.  And calling helps the teacher make a real-time assessment about the state of the whole conversation.

Communicates care and interest in the student.

Highlights.  Cold-calling in the middle of class can signal importance in the question being asked.

Engages.  Help everyone get into the conversation.  Help to direct the conversation to quiet parts of the room.

Enlarges.  Maybe the class conversation is dominated by one point of view.  A cold-call can get more ideas and bring in other perspectives. 

Pivots.  Inject new lines of inquiry

Socializes.  Through calling students into the case discussion, we exercise their capacity to advance their ideas into a conversation.

What to do?


Melissa and I posed a mini-case study about a quiet student, and the difficulty that the instructor was having in drawing that student into classroom discussion.  Suppose a colleague came to you with that problem, what advice might you offer?

Write to the quiet student.  Express your concern for the student’s low participation and invite a meeting to discuss an action plan to improve.

Act like an ally, not an adversary.

Emphasize that a case discussion is a conversation that belongs to all of us.  Every person has an obligation to sustain the quality and energy of the conversation.

Pause more when you see hands in the air.  Introverts take a moment to process a question and frame a reply.

When planning to call a quiet student into a discussion, think carefully about how you will frame the question.  Extroverts will respond by answering the question they want to answer.  But introverts will tend to respond to your question, and probably want to please you with a response.  Therefore, frame the question thoughtfully.

Tactics to draw quiet students in:

Invite them to summarize conflicting points of view or positions taken by others.  This offers a relatively low-risk opportunity to talk.

Ask if they understand what someone else just said.

At the end of a class, ask the quiet students which other students helped them with the biggest impact on their learning that day.

At orientation, reaffirm the value of participation.

Reflect: what implicit assumptions are there in the culture of the section about when it is appropriate to talk?

Reflect: if the students, in general, are too quiet, it is possible that you are doing too much telling, and not enough asking.

The hour flew by.  And the group of assembled colleagues seemed to have plenty more to say.  Perhaps we should reconvene on this topic again in the fall.  Subjects tabled for some date in the future would include how the “quiet” temperament fits into conventional models of leadership; should a school actually recruit for attributes of “quiet”?  And is there a “cool culture” at school?


This session and the previous two (here and here) lend a basis for reflection by the instructor.  With the forthcoming break at the end of the semester (and for some, the summer), this is a useful time to take stock.  Best wishes to all for renewal in the weeks ahead!




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Teaching with Technical Notes

So much of the art of teaching by the case method involves asking rather than telling.   We teach this way out of a belief and considerable evidence that learning “sticks” when a student makes his or her own sense of an idea, as opposed to passively memorizing it.  And one of the most important decisions a case teacher must make is choosing where the “sense-making” should begin.  Do you start with first principles, or somewhere higher up the intellectual ladder?   I would guess that most teachers in graduate business school opt for higher up.  But when you have a diverse student body, it is helpful to have some supporting materials for your case studies that can help level the playing field.  These materials are typically called “technical notes.”  How and where should one use them?


Darden faculty gathered recently for a seminar on teaching at Darden led by Yael Grushka-Cockayne and myself.  The subject was “Exploiting Technical Notes and Other Supplements for the Learner.”  At the outset, a show of hands suggested that some 80% of the attendees had written technical notes; and virtually all of the instructors had used them.  Of course, defining a “tech note” might include all kinds of didactic materials, such as a Darden Business Publishing tech note, Harvard Business Review article, review paper, book chapter, research working paper, a webpage, and a video.   Getting the most out of technical notes is a challenge relevant to all case teachers.  What are some of the considerations or best practices about using technical notes?


Our discussion grappled with four sets of questions:

  • Whether or not to use technical notes.  We began by asking why colleagues have chosen to use tech notes—or why they have consciously NOT used them.  Here are some responses:


Why use technical notes?

Why NOT use technical notes?

§  Explain things for the non-technical student: theory, research findings.  Give examples.

§  Might accelerate learning.  “Turbo-charge” the class discussion.  Show a process or method to be used in preparing to discuss a case study.

§  Serve to squeeze in ideas in a short space of time.

§  Free up time for other interesting discussion topics.  Might help to lift the richness of case discussions to a higher level.

§  Can help to sustain substance of the curriculum at a high level.

§  Control the message a bit: no right answers, but many wrong ones…here’s what to watch out for.

§  Generally, support the learning objectives for the module or course.


§  Learning “sticks” when it is acquired through problem solving.  Tech notes might short-circuit the self-discovery through problem solving.

§  Might conflict with learning objectives.

§  Disconnects the student from the “real world,” tilts the tone of learning from practice to scholarship.

§  Might create dependence or passivity.

§  Must be tailored to the readiness of the student and the position in the course.

§  Different students experience tech notes in various ways—using tech notes is not guarantee of general learning.

§  Too easy to use a good note in the wrong way.  Different tech notes serve different purposes: a) “this is how you bake the cake” versus b) “these are the ingredients, now you decide how to bake.”

§  Cannot truly substitute for the richness of student-faculty interaction.

§  We want to promote students to think critically about the world, not just accept conclusions.

§  Can take students into minutiae before they master the “major muscle movement.”



  • If we must use them, should we assign them for reading before or after the class—or even, maybe embed a technical presentation within the case for the day?  The answer depends on the learning strategy that the instructor adopts and the instructors learning objective for the session.  Exactly what will be the growth to be achieved that day?  Sometimes, students’ struggle with solving a problem can help motivate learning the tools and concepts embedded in a tech note.
  • How much should we rely on technical notes in our curriculum?  At Darden, perhaps a quarter of the learning materials we distribute students are didactic presentations of one kind or another.  Clearly, tech notes are a major component of the student learning experience at a case method b-school.  The colleagues in our session seemed to believe that the mix of cases and technical material was about right.  One said that what mattered was not the bulk or mix of learning materials to students, but rather, what happens in the classroom.  Another pointed out that most of our tech notes are tailored to marry with our case studies and that such tailoring has a huge benefit. 
  • What is happening in our environment that might drive the greater use of technical notes?  Colleagues cited changes in program design (such as shorter course lengths), rising expectations of mastery for MBA students, and smarter students. These factors might contribute to both students and faculty feeling the need to include more tech notes to supplement the face-to-face sessions.


Colleagues ended the session by concluding that our use of technical notes needs to be driven by learning strategies, for the program, for individual courses, and for individual class sessions.  It is easy to get over-reliant on didactic material, at the expense of deep learning from human debate over chewy dilemmas.  Plainly, the tech note is a useful tool, but one to be used thoughtfully.


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Teaching the “Seasoned Learner”


“Tell me and I forget; teach me and I may remember; involve me and I learn.”

        Benjamin Franklin


The seasoned learner is highly relevant to the work of graduate professional schools generally and business schools in particular, where virtually all of the students are mature learners.  Residential MBA students at Darden average about 28 years old; EMBA students range in their 30s and 40s; and executive education students range up to senior managers in their late 50s.  What difference does the presence of a “seasoned learner” make to the professional school instructor?  The point of this blog post is to consider some of the opportunities and challenges—and how to address them. 


Kristin Behfar [1] and I convened an informal teaching seminar for faculty, focused on teaching the “seasoned” learner.  Our discussion consolidated wisdom from participants around the following points.


1.      What distinguishes the seasoned learner from the novice?

a.      The seasoned learner brings considerable experience and a mental model of the world into the classroom.

b.      The seasoned learner aspires for some self-determination in shaping the learning experience.

c.      The seasoned learner is focused on fulfilling goals and needs, and on building competency on issues related to practice rather than on merely building mastery of a subject. The seasoned learner asks, “How can I use these ideas?” 

d.      The seasoned learner wants to connect and learn from all others in the learning space, not just the instructor.

e.      Teaching the seasoned learner presents a very different set of challenges and opportunities compared to teaching children—as the following table suggests.



Teaching Children

Teaching Adults (or “the seasoned learner”)

Concept of the learner

A dependent.  Teacher takes responsibility for determining what/when/how of learning.

Increasing self-directedness.  Teacher guides and develops the learner’s movement from dependence to self-directedness.

Role of learner’s experience.

Learner’s experience is of less worth.  Teacher’s experience is of more worth.

Adults = big reservoir of experience, a resource for learning.  Adults attach more meaning to learnings they gain from experience.

Readiness to learn

Ready to learn differs by age group.  Therefore, standardized curriculum by age. Evaluation is by the teacher.

Adults are ready to learn when they experience a need to learn. Teacher is responsible to help learners discover their “need to know”—provide diagnostic experiences to measure the gaps in competencies.  Need to involve learners in the process of planning their own learning.  Need to involve more self-evaluation.  Need to time learning in step with developmental tasks.

Orientation to learning

Education is a process of acquiring subject-matter content.  Therefore, curriculum should be organized into subject-matter units.

Adults see education as a process of developing increased competence to achieve their full potential in life.  Therefore, curriculum should be organized around competency-development categories.  Focus should be problem areas, not subjects.  The learning/teaching transaction is the mutual responsibility of learners and teachers.  Focus more on experiential techniques, with emphasis on practical application.

Source: Points synthesized from Malcolm S. Knowles The Modern Practice of Adult Education: From Pedagogy to Andragogy


2.      If goals and needs matter to the seasoned learner, how can an instructor learn about these from the students?  A key precept of student-centered teaching is to start from where the students are. 

a.      Class cards and resumes.  These can be pretty weak sources of insight—you may learn what’s great about the student, but less about needs and goals.

b.      Breakfast, lunch, coffee, dinner, receptions—active listening.

c.      Teaching teams (section faculty, Exec Ed program faculty, the faculty in any team-taught course).  Share insights among each other.  Role of the team leader is important in bringing faculty together.

d.      At the opening class, ASK the students: Why are you here?  Why do you care? What do you want to learn?  What challenges are you facing?  What are your expectations?

3.      If connectivity matters, how can the instructor promote it?

a.      Give students tasks to perform together.

b.      Focus on problem-centered learning—ask students to bring their experiences to the problems.

c.      Physically locate the student in useful ways.  (For instance, the iLab affords students to sit together at circular tables.)

d.      Set ground-rules at the start of a course that help to create a “safe space.”  (Speak freely.  What is said in the classroom stays in the classroom.)

4.      If self-determination matters to the seasoned learner, how can the instructor harness it to draw learnings from the course?

a.      Promote student self-evaluation to help them assess their own growth and/or the existence of any gaps between their aspirations and their level of development.

b.      ASK the students what meanings they have drawn from the educational experience.

c.      Frame exercises and assignments in a way to promote student-generated insights.

5.      The flow of our hour together in this session exemplified the overarching way to think about teaching the seasoned learner.  1) Begin with a clear understanding of the seasoned learner’s wants and needs (Be student-centered: start from where the students are.)  2. Design the learning process to harness the experience of the learners through exercises, applications to practice, and growth of connectivity among students.  3) Ask students to make their own meaning from the educational experience, rather than simply telling them such meaning.  4) From the students’ own meanings, draw more insights about their wants and needs.  This suggests a cycle of work for the teacher of the seasoned learner:




The big message of our work on the “seasoned learner” is that didactic, push-driven, teacher-centered teaching isn’t likely to work so well with such students.  So, adapt!  Draw on the richness that the seasoned learner brings to class.  Benjamin Franklin, an iconic life-long learner, said it well, “involve me and I learn.” 

  1. I’m especially grateful to Kristin for her collaboration on this subject.  She brought great insight and wisdom to our work. []
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Recommended Books for 2016

In contrast to previous years, I will be brief, forgoing my usual exhortation to read more books in the belief that if you’re reading this blog, you are probably doing a lot of reading anyway. And I’ll dispense with telling you how many books I’ve read this year, since doing so always triggers a flurry of email inquiring how I read so much (short answer: I’m a professor and reading a lot is part of my job.) For more suggestions, you can consult my previous recommendations or this gargantuan compilation of hundreds of other lists of recommended books.

Here are some of the best books I’ve read over the past 12 months. They deserve special attention and have my enthusiastic support.

  • Philip Tetlock and Dan Gardner, Superforecasting: The Art and Science of Prediction
    Excellent discussion of the attributes of good forecasters and why forecasting is so difficult. Valuable to all business professionals.

  • Duncan Watts, Everything is Obvious, Once You Know the Answer
    Excellent discussion of the difficulty of inferring insights from social data.

  • John Reader, Africa: A Biography of the Continent
    A comprehensive history of Africa. A foundationally important book for anyone who wants to understand how it got to where it is.

  • Robert J. Shiller, Finance and the Good Society
    Shiller argues that finance is an instrument for improving society—a welcome antidote to the political rhetoric in recent years.

  • Roger Lowenstein, America’s Bank
    An entertaining and insightful history of the Fed.

  • Jimmy Carter, Turning Point
    Carter’s memoir of his entry into politics. He fights electoral corruption in Georgia in his first campaign—and wins. It reads like a thriller.

  • Morgan Ricks, The Money Problem
    A somewhat technical book for aficionados of financial system stability. And I highly recommend it for Ricks’ erudition and wisdom.

  • David Wessel, In Fed We Trust: Ben Bernanke’s War on the Great Panic
    Perhaps the best one-volume history of the Panic of 2008.

  • Abby Smith Rumsey, When We Are No More: How Digital Memory is Shaping Our Future
    Confronts the ephemerality of digital records and the vital importance of preserving books for future generations.

And best wishes to you and your loved ones for the holidays and the New Year.

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Liveblogging the Great Depression: Comparison with the Great Recession

As I write this concluding post for the fall semester, the present context gives more meaning to our readings about the Great Depression.  Donald Trump’s startling win in the Presidential election, the buoyant estimates for infrastructure spending (maybe $1 trillion) under the new administration, and the vaulting gains in the stock market invite two questions.  First, is the new talk about higher economic growth for real?  Second, what kind of fiscal stimulus is consistent with the higher growth outlook?  This isn’t the place to try to answer those questions.  But if economic growth is the topic du jour, then our recent reading and discussion were very timely. 


For the fourth meeting of our seminar, Richard A. Mayo and I assigned Barry Eichengreen’s The Hall of Mirrors: The Great Depression, the Great Recession, and the Uses—and Misuses—of History.  This session afforded an economic “long view” of the entire period, afforded a comparison with the Great Recession of 2009-2015, and raised several conceptual points. 


The Long View: 1929-1939


The depths reached in the Great Depression between 1929 and 1933 were bad enough to qualify it for the record books.  But equally stunning was the duration of under-performance.  Popular thinking considers that the Depression ran until 1939.  But as Figure 1 shows, unemployment did not fall below the level of December 1929 until 1943. 



Source: Author’s graph, with data from


And after the breathtaking deflation of 1930-1932, prices would not surpass the level of 1928 until 1942.  But the conventional measure of economic welfare, Gross Domestic Product per Capita, surpassed the previous peak (1929) as late as 1940 (see Figure 2).



Source: Author’s graph, with data based on estimates by Angus Maddison, from


Visible in the two graphs is the fact that the Great Depression actually consisted of two slumps: 1929-1933 and 1937-38.  In between was an episode of healthy per capita GDP growth of 7.05% (1934), 6.9% (1935), and a whopping 13.5% (1936).   


The year, 1936, proved pivotal not only for economic growth, but for several new themes that enriched further our understanding of the Great Depression.

1.      Rise of populism.  Social and civic stress blossomed into various kinds of social protest.  Labor unions strengthened and struck.  Radio broadcaster Father Charles Coughlin fanned popular anger with virulent anti-establishment, anti-elite, anti-semitic, and nationalistic messages. Senator Huey Long sought to “make every man a king” through a “share the wealth program.”   Communist sympathizers pointed to the supposedly robust health of the USSR and excoriated the capitalist system.  Fascists pointed to Hitler and Mussolini as exemplars for fixing American government. The populist sentiments pulled FDR to the left in an effort to retain his coalition.  Indeed, his speeches and messages criticized monopoly power, the wealthy, and private enterprise as causes of the slow recovery; the President attacked “economic royalists.”  This change in tone had the effect of legitimizing the message of social protest and alarming business decision-makers.  Robert Higgs has argued that the intervention in markets, rising regulation, and hostility toward business created investment uncertainty that brought on the second slump.  In contrast, Barry Eichengreen cites rising labor costs as a depressant on economic growth in the late 1930s, reflecting growing union militancy.

2.      Shift from reform to relief.  The legislative record of FDR’s first term substantially consisted of new laws and regulations designed to make the economic system fairer and more stable, and to promote recovery.  FDR sought to “save capitalism” by reforming the system.  In December, 1933, John Maynard Keynes had written to FDR, criticizing him for emphasizing reform over relief.  Notwithstanding the legislative successes of his first term, employment had not recovered.  Furthermore, the Supreme Court ruled unconstitutional the National Industrial Recovery Act (the centerpiece of FDR’s reforms) and other New Deal laws.  Shortly after his re-election, FDR sought to “pack” the Supreme Court by increasing the number of justices from nine to 15; but Congress balked.  With that, FDR pivoted toward policies by which the government itself would put people to work.  The so-called “Second New Deal” successfully passed the Works Progress Administration (to give unemployed Americans jobs), the Wagner Act (to give labor unions the right to organize), and the Social Security Act (to give assistance to the aged, the unemployed, dependent children and the blind.)  Moreover, FDR abandoned a commitment to balance the federal budget and endorsed deficit spending as a stimulus to economic growth.  Finally, FDR reorganized the Executive Branch and creating the Executive Office of the President to give him more targeted advice with which to motivate and direct the bureaucracy. 

3.      From national toward international.  American sentiment was isolationist during the 1930s. FDR was an economic nationalist during his first term.  And between 1935 and 1939, Congress enacted five neutrality laws to prevent engagement in foreign wars.  Isolationism was a natural outgrowth of the Depression and the memory of defaulted loans that financed allies in World War I.  However, Japan’s full-scale invasion of China in 1937, Stalin’s “Great Purge” of 1937-38, Germany’s occupation of the Rhineland in 1936 and annexation of Austria and Czechoslovakia in 1938, and the Spanish Civil War of 1936-38 awakened American policy makers to threats to world peace.  With the commencement of hostilities in Europe on September 1, 1939, FDR formalized aid to China and Britain. 


To this narrative of the lengthy unfolding of the Great Depression, Barry Eichengreen’s Hall of Mirrors brings a valuable perspective on at least three topics.


Why the Depression lasted so long.  Eichengreen points to the steep trajectory of recovery from 1933 to 1936 and implies that at that rate, the depression would have ended soon.  Indeed, looking at Figure 2 and extending the slope of recovery in 1936 forward in time, it seems plausible that the Depression would have returned to pre-crash GDP per capita in the next year.  Eichengreen argues that the second downturn was the result of two policy errors: fiscal austerity and monetary tightening.  He wrote,

“It thus took a concerted effort by everyone from FDR on down to produce another recession.  The president had again become obsessed with balancing the budget.  Large deficits, as he saw it, were a sign that the economy was still ill.  Balancing the budget , on the other hand, would signal that the emergency was over.  Doing so would give a welcome boost to confidence.  Not for the last time in the annals of economic policy , there was also an element of political expediency involved.  Having campaigned in 1932 on a promise to balance the budget, FDR became fixated on the idea with the approach of the 1936 election.  It was not so much criticism from the Republican Right that the president feared.  Rather, he worried about a challenge from the Left in the person of the radio priest Father Charles Coughlin, who…turned against him on the grounds that the New Deal was insufficiently ambitious; it marked “two years of surrender, two years of matching the puerile, puny brains of idealists against the virile viciousness of business and finance, two years of economic failure.”…Thus, balancing the budget and populist tax policies could go hand in hand.  This political strategy led FDR to push, and the Democrat-controlled Congress to agree to, higher taxes…More important, surely, was the restrictive turn in monetary policy…The decision by the Federal Reserve Board…to raise reserve requirements from 13 to 19.5 percent in August 1936, 22.5 percent in March 1937, and 26 percent in May was intended to restore the effrectiveness of the central bank’s conventional policy tools…Treasury Secretary Morgenthau was among those preoccupied by the specter of inflation…To neutralize the inflationary threat, the Treasury Department now sold bonds from its portfolio…mopping up the additional cash and removing it from circulation.”  (Pages 266-270.) 

The combined impact of actions by the Fed, Treasury, and President was highly contractionary.  Eichengreen seems to suggest that none of the three parties took a systems view or tried to understand that together they would nip recovery in the bud.


The Great Depression versus the Great Recession.  Hall of Mirrors is an impressive exercise in the comparison of two economic calamities.  Chapters of the book interleave episodes of the two events.  This literary approach was probably adopted to promote comparisons.  But the back-and-forth induces chronological whiplash.  The grand takeaway is that government policy makers in 2008-9 may have averted a second Great Depression, but that the long duration and slow recovery stemmed from some of the same errors as Hoover, FDR, and associates.  What went well in 2008-2014 was the generally stimulative monetary policy of central banks.  On the other side of the ledger, regulatory stabilization of financial institutions was inconsistent (think of Lehman); fiscal stimulus was too soon and where it occurred, petered out too early; given the absence of fiscal unity, the European Monetary Union seemed doomed to fail; and the lapse into fiscal austerity in the U.S. and Europe in 2010 choked off growth.   


Economic theories about growth.   Eichengreen argues from Keynesian principles that the length of the Great Depression and Great Recession were due to policy errors that favored austerity.  The classical Keynesian view is that downturns are attributable to slackening demand and can be reversed by government-sponsored stimulus, especially by deficit spending.  Keynes envisions that a dollar spent by government will result in more than a dollar of economic output; therefore, stimulus spending by the government can help to restore economic growth.  


On the other hand, neoclassical economists take the view that consumers, managers, and investors make economic decisions by looking at tradeoffs.  Therefore, cyclical downturns are due to distortions in decision-making that adversely influence the production and consumption of goods and services—what matters are the expectations of decision-makers.  Thus, Robert Barro argues that the spending multiplier might well be less than one, if an added dollar spent by the government means higher taxes and lower growth in the future to repay the debt incurred today.  In particular, supply-side economists assert that the supply of labor, products, services, and money creates demand.  Therefore, the government should deregulate and reduce tax rates to stimulate growth.  Lee Ohanian, an economist at UCLA, reviewed Hall of Mirrors and took a different view from Eichengreen and argued that government interventions in the Great Depression and in the Great Recession prevented the normal return to growth. 


In short, one side would urge governments to fight a depression by stimulating the economy through fiscal spending.  The other side would urge relaxing the temptation to intervene. 


Conclusion: the value of historical comparisons 


If economists can’t agree on what causes depressions and recessions, why should we engage in the exercise of comparing the crises?  (President Harry Truman famously said that if you laid economists end to end, they would point in all directions.)  The deeper question is why study history at all?  Eichengreen responds,

“The historical past is a rich repository of analogies that shape perceptions and guide public policy decisions.  Those analogies are especially influential in crises, when there is no time for reflection.  They are particularly potent when so-called experts are unable to agree on a framework for careful analytic reasoning.  They carry the most weight when there is a close correspondence between current events and an earlier historical episode.  And they resonate most powerfully when an episode is a defining moment for a country and society.” (Page 377.)

Economic and financial crises are messy and chaotic events.  There is no checklist or handbook to tell decision-makers what to do.  Under such circumstances, it seems reasonable to look at precedents for inspiration about what to do and for caution about what not to do.  In that respect, Hall of Mirrors helps to build our frame of reference by recounting two economic calamities.  While it is true that more can be said about these episodes, the book is a valuable foundation for critical thinking when (not if) we enter the next calamity.


Works Referenced


Robert J. Barro, “Government Spending is No Free Lunch,” Wall Street Journal, January 22, 2009.


Barry Eichengreen, 2015, Hall of Mirrors: The Great Depression, the Great Recession, and the Uses—and Misuses—of History, Oxford: Oxford University Press.


Robert Higgs, 1997, “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War,” Independent Review, Vol. 1: 561-590.


Lee Ohanian, 2016, “The Great Recession in the Shadow of the Great Depression: A Review Essay on “Hall of Mirrors: The Great Depression, the Great Recession and the Uses and Misuses of History,” Cambridge, MA: National Bureau of Economics Working Paper Series #22239.




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Liveblogging the Presidents: George H.W. Bush

An important lesson of the presidency of George H.W. Bush is the importance of an identity to the success of a leader.  An identity refers not only to substance (as in an ideology) but also style (as in how one gets things done.)  Identity emerges as a crucial issue in a reading of Bush’s memoir, All the best, G. Bush: My Life in Letters and Other Writings and two biographies of him.   This is one of the oddest presidential memoirs to be found—mostly tidbits of diary and correspondence in chronological sequence, but not a narrative argument.  What did President Bush intend for us to take from this? 


Eleven students and I are reading our way through the autobiographies and biographies of the post-Watergate U.S. Presidents. [1]  George H.W. Bush brought to the White House a resume of considerable experience: decorated veteran of World War II, successful entrepreneur, Congressman, Chairman of the Republican National Committee, Ambassador to the U.N., Chief of the U.S. Liaison Office to China, Director of Central Intelligence, and Vice President.  As President, Bush invaded Panama and arrested the military dictator, Manuel Noriega, for drug-dealing.  Bush marshalled some 80 nations in wresting Kuwait away from Saddam Hussein in 1991.  And he adroitly managed relations with China in the wake of the massacre at Tiananmen Square in 1989 and with USSR at the fall of the Berlin Wall and breakup of the Soviet Union.  Yet he failed to gain re-election in 1992, and joined the club of nine other Presidents who sought a second term and where defeated.  To most of these ten Presidents, history has not been kind.  Judged in the longer view, historians rank him at around #22 among all 44 Presidents.  There is no legacy for George H.W. Bush of the kind that graces the memory of his predecessor, Reagan.  Five considerations help to explain why.


Circumstances.  George H.W. Bush (hereafter, “Bush41,” which helps to distinguish the 41st President from his son, the 43rd President, “Bush43”) presided over massive changes in geopolitical history.  The dissolution of the USSR and reunification of Germany narrowly escaped a crackdown and coup attempt by Soviet hardliners.  The massacre at Tiananmen Square threatened to derail the rapprochement with China.   The invasion of Kuwait by Iraq in 1990 and the massing of Iraq’s troops on the border with Saudi Arabia threatened stability in the Middle East.  For his careful handling of these temblors, historians grant him good to very good marks.


Bush41 also inherited the legacy of the Reagan Revolution that had achieved tax cuts without offsetting budget cuts.  The S&L Crisis and onset of a recession in 1990 threatened to deliver record-setting government deficits.  In reaction, the Republican coalition fractured, and generated two populist challengers on the right, Ross Perot and Pat Buchanan.


Character.  Much is made of Bush41’s privileged background.  He was the son of a successful banker who was elected U.S. Senator.  His mother instilled strong values of loyalty, respect, service, and the “obligation to lead” (page 391).  The first eight pages of his memoir are a glossary of names that reveal a great deal about what Bush41 valued: “close,” “closest,” “friend,” “trusted,” describe almost half of them.  Other themes that figure heavily in describing those he values are loyalty, support, intelligence, integrity, honesty and respect.  More than any other presidential memoir, Bush41 displays a strong relational bent.  His memoir is riddled with references to “faith, family, friends” (page 391), “family is key” (page 388).  In describing his reaction to the loss of the presidency in 1992, Bush41 wrote,

“Hard to describe the emotions of something like this…But it’s hurt, hurt, hurt and I guess it’s the pride too…be strong, be kind, be generous of spirit.  Be understanding and let people know how grateful you are.  Don’t get even…finish with a smile and some gusto and do what’s right and finish strong.” (Page 572.)


Choices.  Belying the image of a pampered young man from a privileged background, Bush41 repeatedly made choices that took him out of stable and secure territory.  In 1941, he graduated from Andover and enlisted in the Navy to become an aviator—this, despite a graduation speech by Secretary of War Henry L. Stimson that urged his classmates to go to college.  It was dangerous service by any stretch of the imagination and prove so when he was shot down and rescued in the Pacific Ocean.  After the war, he graduated from Yale phi beta kappa, in a day when the social norm was for Yalies to get a “gentlemen’s ‘C’”.  Then he left the comforts of Connecticut to go to Texas, to sell oil-drilling equipment.  And then, offered a position with the prestigious banking firm of Brown Brothers, Harriman in New York, he declined the offer and instead started his own oil exploration firm.  He helped to build the Republican Party in Texas when being a Republican wasn’t politically acceptable.  He accepted political appointments that advisers said would mark the dead-end of his career (heading the legation in China in 1974, Director of the CIA in 1975).  This is the profile of an ambitious risk-taker, not a silk-stocking namby-pamby.


Judging from declarations and choices that Bush41 made, he positioned himself as a liberal Republican—notwithstanding his support of Barry Goldwater in 1964 and his acceptance of the Vice Presidency under Ronald Reagan in 1980.  He supported de-segregation in Texas in the 1960s, gay rights and family planning.  He purged John Birchers from the Texas Republican Party.  Clearly an internationalist in his reliance on diplomacy and treaties, he was willing to intervene where America’s strike force and moral authority would achieve outcomes for the global good (e.g., Kuwait and Panama.)  He believed in less government intervention in everyday life, and more volunteerism and charity. 


In coaching his speechwriter, Peggy Noonan, about drafting his acceptance speech at the Republican Convention in 1988, he wrote,

Vision. On the domestic side jobs, but jobs in an America that is free of drugs, that is literate, that is tolerant.  On the foreign policy side—peace, but peace in a world that offers more freedom, more democracy to the people of the world.”  (Page 351.)  “What drives me comforts me: family, faith, friends.  We have a special obligation to lead.  We must not forget our responsibility…We owe it to the free nations of the world to lead, to stay strong, to care…strive for a truly bipartisan foreign policy—and never give up on liberty.” (Page 391.)

Noonan fleshed out this brief advice into a broad summation of Bush41’s worldview: a tendency to see life as a series of missions; a “kinder, gentler nation;” gun rights; the death penalty; first rate education; drug free America; inclusion of the disabled; world peace through strength; celebration of the individual; in all, an “enduring dream and a thousand points of light,” “a message of hope and growth for every American to every American” (watch here).  And in his inaugural address of 1989 (watch here),  Bush41 said that he took as his guide “the hope of a saint: In crucial things, unity; in important things, diversity; in all things, generosity.” 


But viewed from the span of 28 years, these addresses look like boilerplate, mainstream Republican orthodoxy.  What, exactly, would Bush41 add to the political stew in Washington?  In what ways would he actually lead?  The acceptance speech and inaugural address presaged Bush41’s signal problem during his presidency, “the vision thing.”  People found it difficult to know what he stood for.  Timothy Naftali wrote that when Bush arrived as a new Congressman in January 1967,

“Bush’s thinking evolved once he reached Washington.  He had few, if any settled policy ideas.  What he had were tendencies: Bush disliked extremism of any kind; he preferred to seek solutions outside of the federal government; he believed in a strong defense and in strong support for the U.S. military; he preferred spending cuts over higher taxes; he opposed segregation and racial discrimination, but he was uncomfortable in having Washington mandate good behavior.  Despite his conservative temperament, Bush proved to be pragmatic and emotional.  Quickly dropping any pretense to being a Texas conservative, he allied himself with moderate civic Republicans, who believed in the goals of the Great Society and the war in Vietnam but wanted both to be managed more efficiently.” (Pages 16-17.)

As one reads or listens to Bush’s speeches in 1992, he seemed continually to be evolving.  Bush contrasted starkly with his predecessor, Reagan, who had framed a series of stirring visions for voters and who had articulated a strong ideology. Whether Bush41 could hold together the coalition of moderate and conservative Republicans would depend on his execution of the vague vision.   


Execution.  The memoir of Bush41 highlights several attributes about the way he executed his responsibilities:

·        He listened.  Bush41 wrote, “Leadership is listening then acting.  Leadership means respect for the other person’s point of view, weighing it, then driven by one’s own convictions, acting according to those convictions.  If you can’t listen, you can’t lead.” (Page 351.)  As a relational leader, listening is paramount.  The inclination to lead by listening proved to be of paramount importance in navigating through the international crises Bush confronted. 

·        He took measured steps in conflict.  At the massacre in Tiananmen Square in Beijing in May, 1989, Bush43 wrote, “Dad struck a careful balance…He denounced the Chinese government’s use of force and imposed limited economic sanctions…Dad drew on his personal connections and wrote a private letter to Deng Xiaoping…whom he addressed as “Dear Friend.” (Page 192.)  Bush43 summarized his father’s decision to liberate Kuwait: “I admired the way Dad handled the situation.  He had taken his time.  He had explored all options…He had rallied the world and Congress to his cause.” (Page 199.)

·        He played the long game.  Bush41’s memoir suggests that he foresaw the economic collapse of the USSR as early as the mid-1980s, but was patient.  To try to hasten change would risk arousing hardliners who might respond in force—as they ultimately tried to do in a coup d’etat against Gorbachev in 1991.  In 1990, Bush delayed recognition of the breakaway Baltic republics to temper the anxieties of Russian hardliners and gain time for a united Germany to be included in NATO.  Timothy Naftali wrote, “Thus, George H.W. Bush for a moment, at least became a great President…risked his international prestige [and negotiated the bipartisan budget] in each case Bush sacrificed short-term political gain for what he considered the national interest.” (Page 98.)

·        He dealt in relationships, not transactions.  In addition to addressing Deng on a friend-to-friend basis, he developed a similar rapport with Gorbachev.  Bush43 wrote,

“Dad’s strategy was to develop his friendship with Gorbachev while privately urging him to allow the Soviet Union to unwind peacefully.  The strategy paid off in early 1991 when Gorbachev agreed to allow a free election for President of the Russian Federation…He believed that encouraging Gorbachev—not provoke the Soviet hardliners—was the best way to avoid a crackdown…I don’t believe Gorbachev could have endured without a partner in the United States.” (Pages 212 and 214.)

·        He played by the rules.  Bush 41 defended his decision not to pursue Saddam Hussein into Iraq, and instead respected the strict limitations of the U.N. mandate to liberate Kuwait: “I still do not regret my decision to end the war when we did.  I do not believe in what I call “mission creep.”” (Page 514.)

·        In victory, he did not gloat.  Humility is one of the dominant sentiments in Bush41’s memoir.  His son echoed this attribute in describing the moment that the Berlin Wall fell in November, 1989:

“Dad faced enormous pressure to celebrate…Dad refused to give in to the pressure.  All his life, George Bush had been a humble man.  He wasn’t trying to score points for himself; he only cared about the results…Freedom had a better chance to succeed in Central and Eastern Europe if he did not provoke the Soviets to intervene in the budding revolutions.  “I’m not going to dance on the wall,” he said.” (Page 195.)


In other respects, Bush41 may have listened, but did not hear so well.  Here he is, recounting his response to White House aides who were worried by a possible challenge from Ross Perot in 1992:

“I told them that in three months, he will not be a worry anymore.  Perot will be defined, seen as a weirdo…Their view is that the move for change is so much outside that outsiders are in and insiders are out; and that Perot can take his money and parlay himself into victory or into a serious threat.  We need to be very wary of this, but time will tell…[On the same page in a footnote, he declared,] They were right and I was wrong.  In the final analysis, Perot cost me the election.” (Page 555.)


But was the problem only Perot?  Bush41 was challenged by Pat Buchanan as well.  Both challengers came from the populist right-wing of the electorate.  At the core of their challenge was Bush’s failure to shrink government spending at the moment of budget crisis in 1990 and to renege on his pledge at the 1988 nominating convention, “Read my lips: no new taxes.”  “The budget agreement was a disaster,” wrote Bush43.  It fractured the Republican Party, obscured other domestic accomplishments and reflected a poor job of communicating and defending the agreement.  Timothy Naftali wrote,

“Whether due to naivete, renewed self-confidence, or arrogance, Bush assumed that his personal charm, his honesty, and his sense of a mutual interest in good government would suppress his opponents’ interest in seeing him hurt politically…Bush became an object of increasing public scorn…made matters worse by reacting ineptly to his image problem.” (Pages 99 and 140.) 

Lyn Nofziger later commented, “He was an ineffective one-term President.  [He] walked away from the Reagan legacy and tried to create his own—and failed at that.” (In Naftali, page 161.)


Outcomes.  The paradox is that close observers like Nofziger deem Bush41 a “failed President,” despite the many accomplishments on Bush’s watch.  The wins would include the end of the Cold War, the successful expulsion of Iraq from Kuwait, the arrest of Manuel Noriega, the unification of Germany, the American Disabilities Act, the Civil Rights Act of 1991, the Clean Air Act Amendment of 1992, the Points of Light Project, and the appointment of two Supreme Court Justices.  Not shabby for a one-term President.


On the other side of the ledger, Bush41 lost to Bill Clinton and prompted moderate Republicans to flee the field.  Clinton won with 43% of the popular vote and 370 electoral votes; Bush received 38% of the popular vote and 168 electoral votes; Perot took 19% of the votes.  The right-wing populists gained momentum as the heirs to the Reagan Revolution and under the leadership of Newt Gingrich wrested leadership of the House of Representatives in 1994.  Essentially, this faction echoed the ideology of Pat Buchanan and Ross Perot: cut the deficits, balance the budget, protect American industry, oppose foreign wars, and generally oppose the establishment and longstanding incumbents.


Epitomizing the incredible reversal in fortunes for Bush41 was his approval rating.  The following graph reveals that during Bush’s first two years, he was popular, if not even highly approved.  His rating peaked at 89% (Feb. 28, 1991) at the end of the Gulf War and hit bottom at 29% 18 months later, on July 31, 1992, at the outset of his campaign for re-election.  By the date of Clinton’s inauguration, Bush’s approval rating was back in positive territory. 



Source: Gallup Historical Presidential Job Approval Statistics


In October, 1987, Newsweek magazine published a devastating cover-story article on Bush, titled, “Bush Battles the ‘Wimp Factor’”. 

“Bush suffers from a potentially crippling handicap — a perception that he isn’t strong enough or tough enough for the challenges of the Oval Office. That he is, in a single mean word, a wimp.  ‘A problem’: The epithet has made its way from the high-school locker room into everyday jargon and stuck like graffiti on Bush. What’s come to be known as the vice president’s “wimp factor” is a problem, concedes Bush pollster Robert Teeter, “because it is written and talked about so much.”… “Fairly or unfairly, voters have a deep-rooted perception of him as a guy who takes direction, who’s not a leader,” says Democratic pollster Peter Hart… (Literally. Last week the “Doonesbury” strip portrayed voters matter-of-factly describing Bush as a wimp.)…Why, then, is he so cruelly mocked? The reasons are both stylistic and substantive. Television, the medium that makes Ronald Reagan larger than life, diminishes George Bush. He does not project self-confidence, wit or warmth to television viewers. He comes across instead to many of them as stiff or silly… Beneath such surface qualms lie deeper doubts. What does Bush really stand for? His two decades in government have produced an impressive resume — congressman, U.N. ambassador, Republican Party chief, China envoy, CIA director, vice president. But his imprint on all those jobs is indistinct, even his friends admit, and he seems to have avoided the great social and political controversies of a quarter century. In short, Bush is by and large a politician without a political identity.”

Biographer Timothy Naftali wrote:

“In the nearly quarter century since his first run for federal office, Bush had yet to fashion for himself a political program.  He had coexisted with three major Republican leaders, Goldwater, Nixon, and Reagan, each of whom saw the world differently, and Bush had served each of them loyally.  Many observers considered Bush’s political adaptability a sign of weakness…No one questioned the physical courage…It was his political courage that was in question.” (Page 51.)


The memoir of Bush41 recounted the wimp episode with emotion.

“Handlers want me to be tough now, pick a fight with somebody…the ‘wimp’ cover, and then everybody reacts—pick a fight—be tough—stand for something controversial, etc. etc.  Maybe they’re right.  But this is a hell of a time in life to start being something I’m not.  Let’s just hope the inner strength, conviction, and hopefully, honor can come through.” (Page 369.)


Reflections for leaders


What explains the unusual format of Bush’s memoir?  As with most memoirists, he wanted to explain himself, not just what he did, but who he was.  This was his last, best shot at establishing his identity.  He wrote,

“When I left office and returned to Texas in January, 1993, several friends suggested I write a memoir.  “Be sure the historians get it right,” seemed to be one common theme.  Another: “The press never really understood your heartbeat—you owe it to yourself to help people figure out who you really are.”  I was unpersuaded…Lisa Drew suggested that what was missing is a personal book, a book giving deeper insight into what my own heartbeat is, what my values are, what has motivated me in life…It’s all about heartbeat.” (Pages 21-22.)


George H.W. Bush offers a useful basis for thinking about the identity of a leader.  The undercurrent of Bush41’s career was the lingering question, “Who is George Bush?”  The simple answer is that a mushy vision and political adaptability render the answer, “I don’t know.”  But we can do better than that. The five elements suggest at least two dimensions along which we could size up a leader.

1.      Relational versus transactional.  What distinguished Bush41 from Reagan, Carter, or Ford was his candor about his intense network of relationships, based on family, friends, and faith.  His memoir is unlike any other presidential autobiography that one can find: rather less about policy and politics and much more about relationships.  One of the most important ways to parse leadership styles is the extent to which it is transactional versus relational.  And I hasten to add that no one who is elected to the White House is totally one or the other; but it is very useful to consider tendencies. 


The ultimate transactional leader is the piece-rate bargainer: everything about an exchange is measured in tangible “gives” and “gets”—think of the deal-making of Lyndon Baines Johnson or the “government by deal” implied by the early actions of Donald J. Trump.  With such a leader, extra effort or output wins immediate reward; similarly, retribution for failing to meet goals is quick and Darwinian (think of Trump’s show, The Apprentice, and “you’re fired!”)   The transactional leader may promote competition among followers.  There is no reward for assisting a colleague—it just takes time that you could be using to stay ahead.  Boiler-room sales operations work like this; in more elegant surroundings you will find that some professional services firms and financial organizations offer essentially the same environment.  To get ahead in such organizations, you must stay ahead of the average of your colleagues.  Never admit weakness.  And never hesitate to ask for a better deal.  “If you don’t ask, you don’t get” might be the cultural motto.  The transactional leader can be stressful to work for; the employment demands are clear and the consequences immediate.


The relational leader reflects a more complicated social contract.  What matters is the long-term relationship, not just the near-term tradeoff.  Surely, as the relationship prospers, the individual tends to prosper.  But the contract goes well beyond piece-rate and may include expectations for a contribution to the success of the team, contribution over time rather than in the moment, and contribution to quality rather than simply volume.  As the term, “relational,” implies, the glue for such leaders is not the individual transaction, but rather the strength of the network.  Relational leaders can impose big burdens on their employees, who are asked to live up to a strong internal culture; the employment demands are probably ambiguous and open-ended.


2.      Ideological versus pragmatic. The ideologue is dogmatic and uncompromising, adhering to principles and ideals, a focused partisan.  The principles or ideals derive from values: economic, political, social, or religious.  For the ideologue, justifying a principled stand often entails an emotional appeal to values.  In the public mind, Ronald Reagan and Margaret Thatcher were ideologically-motivated leaders.  Jimmy Carter pursued the Egyptian-Israeli Peace Treaty out of religious conviction.  To follow an ideological leader entails demonstrating loyalty by espousing the right ideas—one needs to drink the Kool-Aid, and do it in a way consistent with the ideology.


The pragmatist, on the other hand is focused especially on the means to achieve some goals.  “To make an omelet, you must break a few eggs,” as the French say.  Ideas are valuable if they are practically useful.  Lyndon Johnson was famous for back-room deal-making in pursuit of his Great Society programs.  Richard Nixon supposedly declared, “We’re all Keynesians now” and supported greater state intervention in markets in the midst of a financial crisis.  To follow a pragmatist leader entails achieving the right outcomes in a way that is efficient and effective.  It is not what you say, but what you do, that counts.  


3.      Morally courageous versus passive.  History has dealt harshly with Presidents who declined to confront and grapple with the supreme challenges of their day.  James Buchanan (1856-1860) allowed “bleeding Kansas” to bleed and did virtually nothing to stop the momentum toward civil war.  Andrew Johnson (1865-1868) declined to implement policies to integrate liberated slaves into society.  “Moral courage,” the willingness to fight or confront problems, is the premier attribute of a leader, according to the memoir by Ulysses S. Grant (1868-1876).  And Theodore Roosevelt wrote:

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”  (Speech at the Sorbonne, April 23, 1910.) 


Our readings about George H.W. Bush suggest that he tended to be a relational pragmatist—and he showed remarkable moral courage at important moments in his career.  Ironically, his adaptability, and his ability to engage with virtually everyone, and his inarticulate summation of what he stood for contributed to his defeat.  A sense of identity makes it easier for followers to know what the leader stands for.  It will be a topic of enduring discussion in our seminar whether the leader chooses the identity, or the times confer the identity on the leader.  The answer resides in the interdependence among circumstances, character, choices, execution, and outcomes.

Works Referenced


George H.W. Bush, All the Best: My Life in Letters and Other Writings, New York: Scribner (2013, revised edition).                


George W. Bush, 41: A Portrait of My Father, New York: Crown Publishers, 2014.


Timothy Naftali, George H.W. Bush, American Presidents Series, Times Books, 2007.






  1. After our first seminar meeting, I distilled our discussion into five components for understanding a President: circumstances, character, choices, execution, and outcomes.  And I argued that these components are interdependent, making it challenging to understand causality: when we encounter a successful or failed President, the temptation is to point to simple explanations.  Our study of the Presidents this year suggests that success or failure is usually a more complicated story. []
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Liveblogging the Presidents: Ronald Reagan


“This idea — that government was beholden to the people, that it had no other source of power is still the newest, most unique idea in all the long history of man’s relation to man. This is the issue of this election: Whether we believe in our capacity for self-government or whether we abandon the American Revolution and confess that a little intellectual elite in a far-distant capital can plan our lives for us better than we can plan them ourselves.” – Ronald Reagan, “A Time for Choosing,” Goldwater Campaign speech, 1964. (Read here.)


“Let’s make America great again.” – Reagan campaign poster, 1980.


“It’s morning again in America. Today more men and women will go to work than ever before in our country’s history. With interest rates at about half the record highs of 1980, nearly 2,000 families today will buy new homes, more than at any time in the past four years. This afternoon 6,500 young men and women will be married, and with inflation at less than half of what it was just four years ago, they can look forward with confidence to the future. It’s morning again in America, and under the leadership of President Reagan, our country is prouder and stronger and better. Why would we ever want to return to where we were less than four short years ago?”  — Reagan re-election campaign, 1984 (Listen here.)



Reagan communicated very effectively.  The political power of the word spoken well may be the prime lesson of Reagan’s presidency.  Of course, his presidency stands out for other attributes as well: his conservative ideology, his muscular foreign policy, and for a “revolution” in the relationship between government and governed.  As an aspirant to the White House, he was disparaged as a Hollywood actor.    Yet he was elected to two terms as Governor of California (one of the largest states in the nation) and in 1980 was elected President by a “landslide,” gaining 489 electoral votes. [1]    He was the first President in 28 years to serve two full terms.  ((Dwight Eisenhower’s second term ended in 1960; Reagan’s ended in 1988.))  Judged in the longer view, historians have been kind to him, ranking him recently at #9 among 43 Presidents.  And the “Reagan Revolution” appears to have had lasting impact.  It would seem that Reagan’s presidency holds some lessons for students of leadership.


This post continues my reflections stemming from the year-long seminar that I’m leading on the “Leadership Lessons of the Post-Watergate Presidents.”  In that seminar, we’re reading the memoirs and biographies of these Presidents.  In my first course post, about Gerald Ford, I offered a model for thinking about the Presidents that focuses attention on five elements: circumstances, character, choices, execution, and outcomes.  Reagan’s profile on these elements is distinctive, especially in comparison with his two immediate predecessors, Ford and Carter:

1.      Circumstances:  The Watergate scandal and associated revelations of 1972-1974, Arab oil embargo of 1974, America’s ignominious exit from Vietnam in 1975, recession of 1974-75, “stagflation” of 1978-79, and the Iran Hostage Crisis of 1979-80 put the electorate in an ugly mood for the 1980 presidential election.  The incumbent powers in national politics (left/liberal Democrats and centrist Republicans) seemed played out.  Conservative Republicans had been building momentum since Reagan’s first election as Governor of California in 1967.  Reagan entered office with a crisis in the public sector (in contrast to Franklin D. Roosevelt, who entered office with a crisis in the private sector).  Reagan wanted to be identified with a resurgence, a recovery of domestic conditions, with “Morning in America.”  Reagan’s overarching goals during his presidency were to reduce the scope of government and end the Cold War.

2.      Character: Almost a third of Reagan’s memoir, An American Life, is devoted to his upbringing and preparation as a politician.  Born into a humble socio-economic setting, son of an alcoholic father and of a mother of strong character, Reagan made his own way.  Indeed, much of the memoir is the portrayal of Reagan as everyman, the iconic American, who, through hard work, ingenuity, faith, optimism, and fair dealing, succeeded in family, career, and service to others.  Pivotal character-building experiences for Reagan included learning to broadcast sports events (helping listeners “see” a game through Reagan’s words), expelling communists from the Screen Actors Guild of which Reagan was president, and speaking to employees of General Electric (a graduate school in political science, he said.)    Reagan wrote, “During eight years of travels for General Electric and during the campaign for governor, I’d gotten a good idea of what was on the minds of people.  They wanted their government to be fair, not waste their money, and intrude as little as possible in their lives.”  (Page 170.)

3.      Choices:  One chooses one’s ideology.  By 1980, Reagan had views that were distinctive, fresh, and appealing to the electorate.  “Conservative” was a label tarnished by memory of such people as Herbert Hoover (the “Great Engineer” who failed to avert the Great Depression and then railed against the New Deal), Joseph McCarthy (demagogic Senator and communist-chaser), George Wallace (racist), and the John Birch Society (right-wing conspiracy theorists).  The identity of such conservatives was to be against trends in society.  Reagan on the other hand seemed to frame an ideology for values that had broad appeal: freedom (from an intrusive government), light taxation, law and order, right to work, and capitalism.  Reagan wrote, “The classic ‘liberal” believed individuals should be masters of their own destiny and the least government is the best government; these are precepts of freedom and self-reliance that are at the root of the American way and the American spirit.”  (Page 135.)   Reagan believed in small government and quoted James Madison (“there are more instances of the abridgement of the freedom of the people by gradual and silent encroachment of those in power than by violent and sudden usurpations”) and Thomas Jefferson (“What has destroyed liberty and the rights of men in every government that has ever existed under the sun?  The generalizing and concentrating of all cares and powers into one body.”) (Page 196.)  And Reagan was a staunch defender of capitalism and critic of socialism and communism.  He broke a diplomatic taboo by labeling the Soviet Union the “Evil Empire” and wrote, “The great dynamic success of capitalism had given us a powerful weapon in our battle against Communism—money.  The Russians could never win the arms race; we could outspend them forever.  Moreover, incentives inherent in the capitalist system had given us an industrial base that meant we had the capacity to maintain a technological edge over them forever.” (Page 267.)   Reagan believed in American exceptionalism.  In one speech, Reagan said, “I, in my own mind, have thought of America as a place in the divine scheme of things that was set aside as a promised land…this land of ours is the last best hope of man on earth.” (Weisberg, pages 30-31.)

4.      Execution:  Four attributes stand out regarding Reagan’s leadership style: excellent communication, determination, and delegation. 

a.      Communication: Reagan portrayed a charm and approachability that established warm rapport with an audience.    He told stories and jokes with ease (listen here and here.)  Reagan’s memoir conveys his rules for speaking, “I prefer short sentences; don’t use a word with two syllables if a one-syllable word will do; and if you can, use an example.  An example is better than a sermon…I usually start with a joke or story to catch the audience’s attention; then I tell them what I am going to tell them, I tell them, and then I tell them what I just told them.” (Pages 246-7.)   For more insight into the possible impact of the spoken word, you should listen to Reagan’s two inaugural addresses (1981 and 1985), his “Evil Empire” speech in 1983 (here), and the speech in Berlin in 1987 (“Mr. Gorbachev, tear down this wall.”) (here). 

b.      Determination:  Perhaps reflecting his strong ideology, Reagan emerges not as the Washington-style pragmatist (like Ford, Bush41, or Clinton) but as a friendly but firm advocate for his principles.  The Reagan administration was unable to reduce federal spending because he had no majority in the House of Representatives, which originates spending bills—“This was one of my biggest disappointments,” he wrote.  (Page 335.) But Reagan’s determination may be best reflected in his dealings with the Soviet Union and his aspiration to eliminate nuclear arms.  Reagan wrote, “As the foundation of my foreign policy, I decided we had to send as powerful a message as we could to the Russians that we weren’t going to stand by anymore while they armed and financed terrorists and subverted democratic governments.  Our policy was to be one based on strength and realism.  I wanted peace through strength, not peace through a piece of paper.”  (Page 267.) The Strategic Defense Initiative (SDI) relied on unproven speculative technology.  But SDI proved to be an important bargaining chip.  Even though many American experts doubted the effectiveness of the technology, Reagan quipped that as long as Gorbachev thought it would work, Reagan was going to pursue it.  His strategy paid off with a breakthrough accord to reduce nuclear arms.  

c.      Delegation:  Reagan was a champion delegator—in strong contrast to Carter, who might be deemed a micromanager.  But he did not monitor his delegates very carefully.  He trusted his appointees to implement his directives, which ultimately got Reagan into trouble in the Iran-Contra Affair that tarnished his second term.  Almost a quarter of Reagan’s memoir is preoccupied with the scandal.  In essence, a scheme to trade arms for hostages violated Reagan’s ban on negotiating with terrorists.  And a subterfuge in marking-up the sale price would provide financial support to anti-Sandinista guerillas in Nicaragua—this violated laws prohibiting such support.  Congressional investigations and the Tower Commission, which studied the affair, strongly criticized Reagan for inattention and lack of supervision of subordinates.  On March 4, 1987, Reagan addressed the nation on TV and took full responsibility for the affair, though in his memoir, Reagan admitted, “On any given day, I was sent dozens of documents to read, and saw an average of eighty people   I set the policy, but I turned over the day-to-day details to the specialists.  Amid all the things that went on, I frankly have had trouble remembering many specifics of the day-to-day events and meetings of that period, at least in the degree of detail that subsequent interest in the events has demanded.” (Page 516.)  Twelve subordinates were indicted for violation of the law.  Oliver North and others have asserted that Reagan knew what was going on.  Some observers think Reagan was lucky not to be impeached.  Yet as the “Teflon President,” Reagan emerged in January 1989 with a 64% approval rating, the highest end-of-term approbation for any President up to that time.

5.      Outcomes: In his 1980 campaign, Reagan asserted that America was losing faith in itself.  By 1988, America seemed to have rediscovered its mojo.  Aside from an assertive foreign policy that stood up to Soviet expansionism, the American economy recovered. 






Many political scientists note that the approval ratings of Presidents are highly sensitive to economic growth and employment.  No doubt, Reagan benefited from the buoyant economy.  The booming economy was due in part to the dramatic Reagan tax cut in his first term, which owing to the inability to cut spending, contributed to the debt problem the country faces today.


From the long view of 28 years, the legislative, diplomatic, and administrative achievements of the Reagan administration seem dwarfed by the larger and more inchoate legacy of the “Reagan Revolution.”  Biographer Jacob Weisberg wrote, “What Reagan did change was the public’s attitude toward government, for better or worse.  Reagan followed a string of foreshortened presidencies: those of Johnson, Nixon, Ford, and Carter.  Many political scientists came to believe that the job had become impossible: the executive branch was too vast and complex for any one person to manage.  Reagan’s popularity and accomplishments restored the idea that someone could be successful in the job.” (Pages 152-3.)


Judging from the primary campaigns and debates in 2016, the Republican Party platform reflects the long legacy of Reagan. [2]  Stephen Skowronek, a political scientist at Yale, has offered a theory that presidential leadership and ideology cycle through time and that the liberal ideology of Franklin D. Roosevelt’s New Deal ran out of public support with the Carter administration and that the election of Reagan marked a new cycle in “presidential time.”  Skowronek wrote, “[Ronald Reagan] came to power in circumstances that recalled the great reconstructive crusades of the past.  An economic crisis had highlighted the accumulated burdens of the old regime and indicted its political, institutional, and ideological supports.  The Republicans took control of the Senate for the first time in twenty-eight years, and, with the Democratic party in disarray, the administration quickly fashioned a working majority in the House of Representatives…His administration opened with a broadside assault on the ruling formulas of a bankrupt past: “In the present crisis, government is not the solution to our problem; government is the problem.”  This message would be hammered relentlessly over the next eight years, each blow directing the presidential battering ram against the institutions and principal clients of the liberal regime.” (Page 414.)  Skowronek’s assessment in 1993 was prescient.  In the election of 2016, the Republic Party celebrated gaining control of both houses of Congress, the White House, and 38 out of 50 state governments.  As the following figures show, the Republican base in Congress has grown more conservative over time.




Perhaps the trend in Congress reflected the trend in the Republican voter base.  The following figure shows growing conservatism among Republican voters.





Source: both graphs downloaded from


Reflections for leaders


Reading Reagan’s memoir and various biographies of him highlight lessons about communication, delegation-and-control, determination, ideology, and character.  To synthesize among these lessons, here are four final reflections.

1.      Get a vision.  What distinguished Reagan from Carter or Ford was his ability to plant a vision in the popular consciousness: the “city on a hill,” American exceptionalism, freedom from government intrusion, and pushback to socialism and communism.  The difficulty of the “vision thing” would contribute to the downfall of Reagan’s successor, George H.W. Bush.  A vision creates a sense of identity for the leader, making it easier for followers to know what the leader stands for.  In my own experience as Dean, I found that alignment of a community around mission and vision made the rest of leading more fruitful (not necessarily easier, but more productive.)

2.      Presence matters.  So many observers argue that Reagan was the “Great Communicator.”  But in watching videos of his speeches, one gets a sense that it was more than that.  He had great presence.   Reagan’s presence was a blend of folksy approachability and conservative determination.  In contrast, Carter and Ford seemed awkward in the presidency—if they had any presence, it was due more to the office than the person.  Presence contributes to the leader’s identity, but it also commands respect.  Amy Cuddy and others have interesting books on developing leadership presence.   My colleague, Lili Powell, teaches an excellent course on the subject.

3.      Coordinator-in-chief.  Reagan delegated too much and monitored too little.  His famous saying, “trust but verify” worked in negotiating nuclear arms reductions with the Soviets, but was not observed in his oversight of Poindexter, North, and the Iran-Contra people.  The President cannot manage all the details, but needs to balance delegation with monitoring.

4.      Is a leadership model repeatable?  The correspondence between Reagan and the candidacy and election of Donald Trump is eerie.  One sees similar campaign mottoes (“Make America Great Again”), similar repudiation of elites and conventional thinking, and unusual communication skills and strategies.  Will 2017 mark the beginning of one of Skowronek’s presidential cycles?  The history of Reagan suggests that it will take a few decades to tell.


Works Referenced


Reagan, Ronald, An American Life, New York: Simon & Schuster, 1990.


Skowroneck, Stephen, The Politics Presidents Make: Leadership from John Adams to Bill Clinton, Cambridge: Belknap Harvard, 1993.


Weisberg, Jacob, Ronald Reagan, New York: Times Books, 2016.







  1. Reagan’s landslide accrued only 50.7% of the popular vote, less than other popular presidents.  The American Constitution entails a weighted voting system that favors less-populous states. []
  2. In some material ways, the leadership of Donald Trump departs of the Reagan model, which calls into some question its sustainability. []
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Liveblogging “Financial Innovation” Week 14: Following a Path


But now it looks to me as though I was following a path that was laid out for me, unbroken, and maybe even as straight as possible, from one end to the other, and I have this feeling, which never leaves me anymore, that I have been led.

— Jayber Crow, Wendell Berry

This has been a big course: 28 class sessions, about 1,400 pages of required reading, numerous in-class exercises and videos, and eight visiting speakers.  And we went off the rails compared to most Darden courses: no case studies, just articles; flat classroom, iLab location; discussions led by students; liveblogging by the instructor; and diverse attendance from Darden, the Law School, the Batten School, and the Economics Department.   So, after all of this, where have we come to? 

Along the path

Conventional wisdom is that the task of teachers is to get students to a destination of greater mastery.  But an unrelenting focus on a destination can lead to rote instruction, teaching to the test, and rather dull learning.  Important mastery arises from the process of learning.  As Michel de Montaigne said, “It is the journey, not the arrival, that matters.”  The most important learnings are about how and why to get somewhere, rather than the “what” of the there that is there.  Financial innovation is changing so rapidly that anything one might say about the blockchain or fintech today would be obsolete in a year.  Rather, what matters is the ability to ask the right questions, to think critically, and to translate values and analysis into actions.  We esteem competent technicians and software engineers, but you can hire those skills.  Larger value-added comes from conceiving new markets, institutions, instruments, services, processes, social impacts, and government policies.  Through a process of reflection, exercises, and exposure to instructive examples, one grows in the ability to add value through financial innovation.  So, the course design reflects an effort to grow that ability. 

The result has been this rather unconventional path for the past 14 weeks.  It would be the height of hubris to suggest that I laid out the path with certainty about the experience you would have.  It’s a messy, dynamic, even chaotic subject—we should question pundits who claim to have it all figured out.  Given such disorder, it is wrong for a teacher to impose false order.  Therefore, the course embraced the disorder and had to be taught differently.  Like taking an inflatable raft down the New River Gorge (I highly recommend it), we wouldn’t stay dry if you depended on me to paddle alone.  We all had to pull at the oar.  We all had to contribute to making sense about this subject. 

Now, the key to success in an enterprise like this is to listen very very hard to what the subject is telling you.  Judging from the astute comments you offered in class, you’ve been doing that.  These blog posts are evidence of my own listening to the subject.  What happens when you learn this way is that the subject pulls you along.    As Wendell Berry says, you’re on a path, but you’re actually being led.    

In the way of leading, the syllabus to the course listed three objectives.  It said, “A great university education entails growth in knowledge, skills, and wisdom.  Here’s how this course aims to contribute to that outcome:

·        Growth in knowledge about: 

o   the spectrum of financial innovations over time and currently;

o   various stimulants and inhibitors of financial innovation; and

o   basic tools, concepts and vocabulary related to financial innovation. 

·        Growth in skills, such as

o   Integrating a range of perspectives, such as finance, economics, system dynamics, law, politics, and history—in doing so, the course exercises the ability of students to integrate learning across disciplines.  We will survey a large and growing literature about financial innovation: academic scholarship, professional case studies, and practice-oriented materials. 

o   Assessing the welfare impact of financial innovations (who wins, who loses?);

o   Managing innovation efforts; and

o   Constructive criticism of “pitches” and concepts for financial innovations. 

By the end of the course, you should be able to think more confidently about and discuss concepts for financial innovations. 

·        Growth in wisdom, including:

o   Social awareness: sensitivity to the context of financial innovation; how market and social sentiment can produce receptivity or rejection for innovations.

o   A critical point of view about financial innovations and the opportunities and problems they may present.  We will review criticism and defense of financial innovation in general.

o   Strategic awareness about the vision, and positioning among competing innovations of financial innovations.

o   Ethical awareness about the sustainability, social impact, and success of financial innovations.

o   A bias for action: acceptance or rejection of innovations based on the foregoing.”

The course promoted knowledge through the wealth of readings.  It promoted skills through the exercises and discussions.  And it encouraged wisdom through the reports and discussions.  Ultimately, each student is both the author and judge of progress made. 


Ending with the system


Our exercise in the last two days of the course focuses on innovations to build stability in the financial system.  It’s a fitting conclusion because systemic instability is perhaps the knottiest problem in finance and presents the gravest threat.  But as Jerry Seinfeld would say, “Experts are working on this!”  (Think of the Financial Stability Oversight Council and others.)  Therefore, it may seem presumptuous for us to deign to intrude.  Yet such would have been the charge against successful financial innovators over time.  Moreover, the invitation to participate in a hackathon on systemic stabilization offers the opportunity to exercise ideas we’ve encountered throughout the course and in other courses as well.  One could:

·        Tackle causes.  Researchers aren’t aligned on exactly what causes financial crises, but explanations that have received the most attention focus on these points.

o   Complexity makes it hard for people to know what is going on.  In times of stress, the less-informed players in a market begin to imitate the actions of more-informed players.  This causes herd-like runs on financial institutions.  Therefore, innovate on behalf of simplicity and transparency.

o   Connectivity means that trouble can travel.  Therefore, innovate on behalf of circuit-breakers, and firewalls.

o   External shocks can set in motion the domino-like cascade of a crisis as weak institutions collapse, followed by other institutions.  Think of natural disasters, geopolitical events (wars, trade wars, regime changes), and sharp turns in markets outside of the financial sector.  We looked at catastrophe bonds.  Is it possible to create other kinds of shock absorbers?

·        Tackle symptoms.  Two of the most prominent symptoms of a serious crisis are market crashes and widespread bank runs.  These reflect sharp changes in expectations and confidence.  Is it possible to apply the insights of behavioral finance to stop and/or reverse the adverse changes?  (Think about “nudges.”)

·        Tackle adverse outcomes.  Crises damage the financial system, typically leading to a seizing-up of markets and collapse of credit, the life-blood of commerce.   Financial crises spill over into the real economy and cause extensive damage.  Think of unemployment, consumer hoarding (rather than spending), cuts in capital spending, and negative GDP growth.   

A “hackathon” is a brainstorming session.  Let’s see what you can do with this challenge.




In the way of closure for the course, you may hanker for a grand summary of the blog posts and class sessions.  But that would be a waste of time.  The student leader reports on each class and the blog posts are already in your hands.  And what is more important is the meaning that you, yourself, make of the course.  Rather, consider three final reflections.

Invention, imitation, and innovation.  The course focused on the word, innovation, but repeatedly chafed at the edges of invention and imitation.  Imitation is pervasive in this field.  The vast number of fintech elevator pitches I’ve heard aren’t inventions or innovations.  They are bald imitations.  Learn to parse the original from the duplicate.  Innovation, as dictionaries define it, is the commercialization of inventions.  But in finance, the boundary between invention and innovation is permeable.  John Law, Jerry Nemorin, Robert Shiller, and Doug Lebda were simultaneously inventors and innovators.  The invention/innovation difference is artificial.  Instead, think of it as a unified activity.  This matters because the process of creating social and financial value makes more sense that way.  For instance, where should you seek out the creation of new markets, institutions, instruments, processes, social impact and regulations?  It seems that players on the periphery invent and innovate and that big, established incumbents carry forward the innovation to higher scale.  Innovation tends to originate in the periphery of finance, not the center; it seems to increase in times of social and political change rather than in quiescent periods; and it tends to be led by entrepreneurial visionaries rather than pushed by the general market.  The business and economic context creates challenges and opportunities for financial innovators.  Government policies interact significantly with financial innovation, either ex post, in the form of regulations of markets, institutions, and instruments, or ex ante, in the form of incentives or constraints to which innovators respond. 

It’s not about seeing, but about looking.  Seeing is relatively passive; looking is definitely active.  For what should you look?  As the course unfolded we explored the ways that innovations in markets, institutions, instruments, processes, social impact, and government regulations worked (or didn’t work.)  And we discovered a great connectedness among the parts. 



It proved hard to discuss an innovation in instruments without also considering implications elsewhere.   To create a new financial instrument has implications for markets where it will trade, for the institutions who will intermediate it, for the processes to service it, for the consequences for society, and for regulation—as we have seen, all of these implications can stimulate financial innovations in those other areas.  The biggest implication is that there are no simple stories about financial innovations.  You need a wide mental aperture to take in the broad range of possible reactions.  Think systemically about feedback effects, dampers and amplifiers of the reactions.  Look actively.

Success.  How do you know the outcome of a financial innovation was good?  High financial return is the superficial answer.  We discussed a wide range of indicators such as liquidity, sustainability, customer satisfaction, fulfillment of a social need and reputation.  Innovations that help markets function well— through completeness or greater efficiency—can be profoundly beneficial to others.  Robert Shiller (and others) have argued that the problems associated with financial innovation are not because of too much, but rather too little, innovation.  This implies that the incompleteness of markets (the inability of participants to do what they need) is the dominant problem and opportunity of financial innovation.  Success might also reside in prevention of adverse outcomes or even gain prosperity in the presence of adversity—this is the aspiration of Nassim Nicholas Taleb’s concept of “antifragility.”  The point is that if you tend to get what you measure, then choosing the measures of success is of paramount importance.   At various points in the course, we confronted the possibility of adversities.  Easy access to credit markets through “teaser” mortgage rates prompted some borrowers to binge on credit.  Income-linked student loans might tempt graduates to spend years on the beach.  Structured investment vehicles make it easy for corporations to hide bad assets or too much debt (e.g. Enron).  “Dark pool” markets enabled speedy traders to exploit the slow.  Generally, complexity in the design of markets, institutions, instruments, and processes impeded the perceptions of investors, credit rating agencies, boards of directors, and regulators.  Try to work on chewy problems in a way that can advance, not degrade, the human experience.  ((We discussed worthy problems such as wage inequality, pension shortfalls, and volatility in home values.))  All of this brings us around to James Tobin’s remark that the most important decisions one makes are what problems to work on.  Financial entrepreneurs face a blizzard of opportune problems.  So, work on the worthiest ones. 

*  *  *

This is the end of this path (or maybe the part of your path where I walk alongside).  But I hope you feel sufficient momentum to keep walking—or in the sense of Wendell Berry of being led by the ideas and experiences we’ve shared.  Be well and prosper. 

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Liveblogging “Financial Innovation” Week 13: Government Policy Innovations: Proposals to Regulate Financial Innovations and Innovators

In the penultimate week of our course, we returned to the subject of regulation of financial innovation.  This was the sequel to our work in Week 5, where we discussed regulation as a driver of financial innovation—left unsaid that week was the question, “If we don’t think regulation works so well, what should we do about it?”  So, after reviewing the very wide range of financial innovations, we turn to that question.  In addition, giving some attention to regulation invites us to lift our gaze to the very highest level of financial innovation and consider how we might sustain systemic stability through regulation.


If it’s broke, fix it.


Our visiting speaker, Jo Ann Barefoot, helped to frame for us some fundamental challenges with financial regulation.  She noted that the finance sector of the economy is the most pervasively regulated sector after health care.  And our readings and discussions this semester remind us that frauds, panics, and other outcomes against the public interest occur regularly.  Enforcement gets some of the miscreants.  And pre-emptive remedies work imperfectly.  Pricking an asset bubble is very hard to do well.  Disclosure of information is boring, uninteresting, and doesn’t protect people very well.  The financial system seems structured to discourage access: some 70 million Americans are unbanked or underbanked.  The regulatory regime is fragmented and fraught with internal turf battles.  The regulatory process is slow to change: it takes two years to make a new regulation.  And new regulations tend to look backward at problems just occurred, rather than forward at threats on the horizon.  Regulators have some discretion about enforcement, can get captured by the industry they regulate, and/or can be sleepy or overoptimistic in their enforcement efforts.  Some regulators try to pick winners and losers in an industry, thus pre-empting and distorting the discipline of markets.  Finally, regulators resist change and/or attend to their own self-interest, to protect their prerogatives and obtain a budget appropriation for the next year. 


Some of these criticisms echo my blog post in Week 5.  There, I challenged the reader to consider why we regulate the financial sector.  Releasing firms and individuals from regulatory constraints has popular appeal, as candidates in the recent election suggested.  But there is less clarity about what that business environment would actually look like.  In the pure state of nature without any laws and regulations, life would be (as Thomas Hobbes put it) “solitary, poor, nasty, brutish, and short.”  Almost no one advocates an absolutely free market, so the question comes down to how much regulation to impose.  The answer to that question depends, as I wrote in my earlier post, on what kinds of risk and how much risk one is willing to accept in daily life.


The aims of financial regulation are to promote values that prevail in society: fairness, equality of opportunity, honesty, transparency, and stability (i.e. risk management).  Of these, stability warrants more consideration.  Throughout the course, we focused on discrete segments of the financial sector.  But as I argued at various points along the way, the parts of the financial system are so tightly interconnected that the impact of a financial innovation in one area is bound to be felt elsewhere.  Trouble can travel.  I’ll have more to say about stability in my post for Week 14.


In short, it is hard to find anyone who is truly satisfied with the current system of financial regulation.  But totally eliminating financial regulation seems unlikely to gain a majority in Congress.  We are left with tinkering with the existing system.  It’s broke, so let’s fix it.


How to fix it?  Some proposals.


Our readings for the week and our visiting speaker highlighted some of the prominent proposals.  These aren’t an exhaustive list of the bright ideas floating around.  But our discussion helped to exercise skills of critical assessment that might be shone on other proposals that come along.

1.      Privatize deposit insurance.  We could demand that banks participate in a private insurance company that would take the FDIC out of business.  Bert Ely argued that this would give banks even more “skin in the game,” reduce moral hazard, and take the taxpayers off the hook as funder of last resort.  Gary Gorton countered that while the proposal would improve the incentives for responsible lending among individual institutions, it removes a valuable crisis-fighter in the event of another financial system meltdown.

2.      Establish an FDA-like agency to review and certify new financial products for their “social utility.”  Posner and Weyl argued that financial products can be dangerous to the wealth of individuals.  Just like the FDA certifies the efficacy of new drugs, a new watchdog for financial products could certify financial innovations.  The goal would be to assure that such innovations are used for insurance, not gambling.  On the other hand, this proposal would discourage financial innovation, lengthen the time-to-market, drive entrepreneurs out of the country, and/or drive up the cost of new financial products.  The distinction between insurance and gambling is fraught.

3.      Boost the capital requirements for banks.  Anat Admati and Martin Hellwig argued that the Basel III requirement for about 9% % capital/assets is inadequate and that the effort to calibrate equity requirements to the risk of a bank’s assets creates false confidence.  They suggest that the target capital requirement should be raised to ~20-30% of assets.  This would put more equity capital at risk, deepening the ability to absorb loan losses, countering moral hazard, and perhaps turning banks into sleepy utilities rather than go-go risk-takers.  As one might imagine, the banking industry vehemently opposes this, declaring it a misuse of capital that will destroy the economic incentives, constrain the availability of capital and depress economic growth.  But more recently, I have heard some bankers argue that they would accept the higher capital requirements if the government rescinded most (or all) other regulations on the industry.

4.      More macroprudential regulation and structural redesign.  As opposed to “microprudential regulations,” which aim to protect the individual firm or person, “macroprudential regulation” seeks to reduce instability in the financial system.  Since the Panic of 2008, macroprudential regulation has been a hot topic.  Such regulations measure monetary aggregates, leverage to GDP, capitalization and liquidity of banks, as well as the correlation in performance among banks, i.e., a recognition that trouble can travel.  Kathryn Judge argues for greater regulatory intervention to redesign the financial system.  She notes that financial innovation and the consequent growth in complexity of the financial system heightens systemic risk.  With more complexity there is a greater loss of information.  And because of the rapid rate of innovation, more disclosure of information won’t suffice.  Regulators need to intervene to shorten the intermediation links between the issuer of claims and the investor.  As business process engineers tell us, simplification is generally a good thing.  But at what cost?  As with the FDA-like proposal (#3 above) experience suggests that greater regulatory intervention might clog the system rather than declutter it.  And why is the judgment of a regulator better than the market itself?  The regulator may be able to instill some order in the common interest, but the market participants are closer to the technical challenges and doubtlessly have a great deal of “skin in the game.”

5.      Get tech savvy.  Cornelia Levy-Bencheton shifts our gaze from the challenges posed by the recent financial crisis and toward the current wave of financial innovation, “fintech.”  She acknowledges the enormous compliance burden on banks imposed by Dodd-Frank—by her analysis, it takes 24 million person-hours of work per year for the U.S. banking system to comply with that regulation alone.  And she also points to the disruptive force of fintech.  “We are in hell,” she wrote, because of the “four V’s” of big data: volume, variety, velocity, and veracity.  Her solution: banks must develop a data-driven culture; they must “leverage emerging digital business models, modernizing traditional channels and modeling what is happening in other industries…And new data that needs to be integrated into existing information sets to make banking organizations more agile and effective if they are to stand a prayer of staying relevant.”  Our visiting speaker, Jo Ann Barefoot, outlined some big issues facing regulators as they strive to stay relevant as well.  She cited data management, privacy, fairness, discrimination, failures of disclosure, systemic health, speed of innovation, and the complex regulatory framework.  Reg tech” is bringing technology to address regulatory challenges of disclosure, compliance, risk identification, and risk management.  15-20 countries have “regulatory sandboxes” in which financial innovators can try out their ideas on live customers with less regulatory intervention during the research process.


So what?


The subtext of our work this week is a radical idea, that we can expand the definition of “financial innovation” beyond the private sector to include financial policy innovations in the public sector.  If we define the perimeter of the financial system to include the regulatory actors, we gain more clarity about opportunities and problems associated with financial innovation.  And defining the perimeter more broadly invites us to consider how transferrable is the business perspective into public policy, and vice versa.  We want rules and watchdogs motivated by the public interest, rather than the welfare of some subset of society.  But as our review of the pros and cons of particular proposals suggests, critical scrutiny and wisdom know no country. 

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Liveblogging the Great Depression: Crash and Onset of Depression

This post continues a commentary on readings about the Great Depression.  For the third meeting of our seminar, Richard A. Mayo and I assigned three readings: The Great Crash by John Kenneth Galbraith, The Memoirs of Herbert Hoover: 1929-1941; The Great Depression, and a segment of Freedom from Fear by David Kennedy.  The aims of this session were to study the onset of the depression itself (1929-1933) and to consider critically the early dynamics of the Depression and its causes.  Three questions were the special focus of our discussion:

·        Did the Crash of 1929 cause the Great Depression?  If not, what did cause it and when did the Great Depression begin?

·        What other events marked the descent into the Great Depression?

·        How did President Hoover respond?


The Crash of 1929 and Beginnings of the Great Depression


Our last two sessions looked at the end of World War I, war reparations, technological innovation, and the wave of deflation that swept the U.S. and other countries in the 1920s.  In the popular mind, the Great Depression began with the stock market Crash of 1929—indeed, many people seem to think that the Crash caused the Great Depression.  As I’ve outlined in earlier posts, exactly when the Depression began depends on what you mean by “begin.” 


The National Bureau of Economic Research (a not-for-profit organization of economists) is the accepted authority on defining the starts and stops of economic cycles.  They determine that the downturn that is regarded as the Great Depression occurred in two waves: August 1929 to March, 1933 and May, 1937 to June, 1938.  We will look at the second of these downturns in the spring semester. 


As regards the first downturn in the Great Depression, a cyclical downturn was probably dictated by the Fed’s increase in interest rates in January, 1928.  At the time, the Fed was worried about excess liquidity stimulating a stock market bubble.  By January, 1929, economic conditions were starting to deteriorate.  In June, 1929, business production peaked.  The NBER tells us that a decline began in August, before the stock market crash of October, 1929.   


A recession is shorter and shallower than a depression.  Our readings for this session suggest that the conversion of a recession into a depression was the result of many factors.  Still, did the crash trigger the depression, or was it a consequence?  The economic record suggests that it was a contributor, a turning point, but not the sole cause.   David Kennedy wrote, “The disagreeable truth, however, is that the most responsible students of the events of 1929 have been unable to establish a cause-and-effect linkage between the Crash and Depression.” (Page 39.)  Kennedy reports that 97.5% of the U.S. population owned no stock in 1929.  Thus, the impact of the crash must have been small in terms of the direct “wealth effect.”  But it seems to have had a great influence in the psychology of consumers, investors, and leaders in business and government.  The evaporation of equity value would prompt investors to cut spending and hoard their remaining wealth.  The extent of the wealth effect remains a matter of debate, though Galbraith wrote that it had a “traumatic influence on production, income and employment.” (Page ix.)


By the way, the “Crash” was only part of a larger destruction of equity market value.  The following figure shows that the initial slump from September 5, 1929 (when Roger Babson warned that “a crash is coming”) to November saw the Dow Jones Industrial Index fall from 381 to 210—a decline of 45%.  But from November, 1929 the sell-off continued until July, 1932, sending the Dow from 210 to 42, a decline of 80%.  Overall, the decline from 381 to 42, was a decline of 89%. 


Figure 1.  Dow-Jones Industrial Average, 1929-1932



Source: Macrotrends at


The Decline


Similar to the stock market decline, the decline in economic activity worsened steadily over four years.    Galbraith called the economic decline that began in the summer of 1929 “the beginning of the familiar inventory recession.”  The NBER estimates that downturns last about 18 months on average.  What prolonged this?  What drove it so deep?  The severity of the depression is displayed in the next two figures.  Figure 2 shows that the Great Depression collapsed Gross Domestic Product far below the normal capacity of the economy.  Figure 3 shows that unemployment peaked at about 24%. 




Source: Business Insider at



Figure 3: Unemployment Rate, 1929-1939



Source: Author’s preparation from data at


As we deepen our understanding of the Great Depression, it seems that its severity draws from many factors that seemed to reinforce each other.  Our readings for this session offered three authors’ perspectives. 


Galbraith attributed the crash and severity of the Depression to five causes.  First was the bad distribution of income: a lot of wealth was put in the hands of a few, who used the wealth to speculate.  Corporate profits rebounded significantly in the 1920s, but wages increased relatively modestly.  Second was bad corporate structure: the rise of investment trusts (“a profound source of weakness”) encouraged rent-seeking on the part of promoters.  Galbraith wryly refers to the “bezzel,” the value appropriated by promoters from credulous investors.  Third was a bad banking structure: too many small, undercapitalized banks.  Fourth was the dubious state of foreign debt balances.  The overhang of war debts and reparation payments was a massive drag on European economies and led to the collapse of the gold standard.  Fifth was the poor state of economic intelligence—not only did decision-makers not have much clarity about the economic trends going into the Depression, but also their economic orthodoxy led to actions by the Fed and Treasury that were counterproductive to recovery.  For Galbraith, the story of descent into Depression is an economic story, framed largely around rent-seeking and the flaws in the capitalist system. 


Herbert Hoover marshals considerable evidence to tell what is, essentially, a political story.  He recounts the Depression as consisting of several phases.  At each phase, public policy decisions are made that create a “degenerating vicious cycle.” (Page 87.)  The Depression did not start in the U.S.  The “storm center” was in Europe and originated in the Versailles Treaty of 1919.  Post-war optimism in America created “new era thinking.”  And a stimulative Fed policy created a stock market bubble.  All of this happened “before I entered office.”  After the Crash occurred, “The record will show that we went into action within ten days and were steadily organizing each week and month thereafter to meet changing tides.” (Page 31.)   In 1930, Hoover organized a voluntary commitment by business leaders to maintain wages and employment.  This proved to be unsustainable in the face of continued decline.  From April to July 1931, Hoover focused on “indirect relief” to provide jobs, support wages and prices, limit immigration.  He also sought appropriations for public works.  In 1931, it became evident that European nations would not be able to meet scheduled payments of debts and reparations.  Hoover declared a moratorium on payments.  Still European government engaged in what Hoover called “kiting” of payments among themselves.  Then Britain collapsed and took itself off the gold standard, which damaged business confidence further.  In 1932 Hoover sought Congressional support for an 18-point legislative program of reconstruction finance, land banks, home loan banks all of which encountered political resistance, “a rottenness worse than I had anticipated.” (Page 128.)  Hoover couldn’t understand the failure of Congress to support his program.  He described one Senator as “a curiously perverse person with alternating streaks of generosity and hatred…a profound reactionary.” (page 113.)  In the months between FDR’s election in November, 1932 ,and FDR’s inauguration in March, 1933, the President-elect declined to cooperate with Hoover on a recovery program.  And so on.  Hoover’s memoir reads like a classic tragedy: good man brought low by forces beyond his ken.


David Kennedy’s history of the Great Depression expresses some sympathy for the “ordeal of Herbert Hoover.”  But Kennedy seems interested in giving a history that is more than economics or politics—he features plenty of both but adds a somewhat more social/psychological perspective.  Kennedy tells us about Hoover’s Quaker upbringing and of his belief in the efficacy of volunteerism instead of state intervention. Hoover was an internationalist, but caved in to the populist/nationalist sentiments of Congress when he signed the infamous Smoot-Hawley Tariff.  The nadir of Hoover’s efforts was not measured in economic or political terms but in the expulsion of a social protest movement, the “Bonus Army,” from Washington D.C. in July, 1932—it was, said Kennedy, “the lowest ebb of Hoover’s political fortunes.” (Page 92.)  Kennedy suggests that leadership mattered in the deepening Depression.  Kennedy’s profiles of the major participants lend the view that the awful downward spiral was not dictated solely by large social forces.  Rather, the predilections of key players also mattered immensely.  For instance, of Hoover, he writes,

“Herbert Hoover forged his policies in the tidy, efficient smithy of his own highly disciplined mind.  Once he had cast them in final form, he could be obstinate.  Especially in his last months in the White House, he had grown downright churlish with those who dared to question him.  Roosevelt’s mind, by contrast, was a spacious cluttered warehouse, a teeming curiosity shop continuously restocked with randomly acquired intellectual oddments.  He was open to all number and manner of impressions, facts, theories, nostrums, and personalities.” (Page 113.)

 In responding to the Depression, Hoover clung to what was familiar (like the volunteer effort in fighting famine in Europe) rather than inventing a new response appropriate to the circumstances of 1929-1933.  In short, Kennedy’s history affords the third narrative, about attributes of leadership.


Largely missing from these narratives of 1929-1933 is the dramatic collapse of the U.S. banking system during those years.  Overpopulated with competitors (numbering 26,213 national, state, Building and Loan organizations, savings banks, private banks, and other at June, 1928), [1] unprepared, undercapitalized, and under-regulated, the industry suffered a dramatic contraction.  (In 2016, the U.S. has 5,141 banks.) [2]  Throughout the 1920s, the failure rate of banks was high, averaging 600 per year and concentrated especially among small unit banks in agricultural areas.  As Figure 4 shows, the annual failure rate spiked during the downturn. 


Figure 4: Bank Suspensions During the Great Depression



Source: Author’s analysis drawing on data from Wicker Banking Panics of the Great Depression (1996).


Thus, during the first stage of the Great Depression, the banking industry contracted by about 20% in the number of players.  Lending declined as bankers sought the high ground of exposure to only the most creditworthy debtors.  Individuals hoarded their savings.  In the absence of deposit insurance, a bank failure would mean the loss of some of the depositor’s savings.  The extent of actual losses due to suspensions was probably sizable, but dwarfed in impact by the loss in confidence in the business economy and the increase in fear.


Synthesis: A Pernicious Self-Reinforcing Cycle


The three books for this session help to convey the plurality of narratives for the awful descent into the Great Depression.  The stock market Crash of 1929 occurred shortly after the onset of recession and cannot be said to have caused the Great Depression.  But it probably helped to accelerate and deepen the recession through the “wealth effect” and loss of confidence.  Maladroit responses by government leaders also deepened the Depression.  The Smoot-Hawley Tariff probably had a smallish impact on the U.S. economy but imposed a major chill on diplomatic relations that obstructed coordinated response to the Depression.  Economic historians point to lurches in monetary and fiscal policy that created a drag on recovery—orthodox economic thinking of the day embraced balanced budgets and the “real bills doctrine” in Fed lending into the financial system.  The international economic malaise weakened what should have been a robust economy.  Technological change in agriculture and manufacturing imposed a deflationary bias on the economy.  And finally, attributes of leaders (including obstinacy, pessimism, slow reaction, and weak communication skills) hampered the mobilization of collective action. 


Elements of this saga seemed to reinforce each other, creating a feedback loop that accelerated and deepened the downturn.  Tight Fed policy, recession, stock market crash, political in-fighting, a distressed banking system, and reactive leadership made a toxic stew.  In coming sessions, we will consider what it takes to break a pernicious self-reinforcing cycle.   

  1. 1928 Report of the Comptroller of the Currency, []
  2. Source: []
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