MIT Sloan’s “Downturn Manifesto”

It was like deja vu…last week, a panel of five MIT economists reconvened after six months to discuss the current state of the U.S. economy. As part of MIT Sloan Management Review’s special report “The Downturn Manifesto: a manager’s guide to surviving–and thriving–in recessionary times,” the panel tried to determine whether there’s an end in sight to our financial crisis.

Here are some highlights from that conversation…

Ricardo Caballero, Ford International Professor of Economics and head of the MIT Department of Economics

The current economic team in Washington understands very well the nature of the problem and is working on a financial stabilization plan that has many of the right ingredients…Despite many horror stories you may be hearing, we’re not doomed””and we’re not even close to that.  I do trust that we have a superb economic team in Washington and New York.

William Wheaton, Professor of economics and director of the MIT Center for Real Estate

Today, I actually see a little light at the end of the tunnel. The reason? A remarkable turnaround in a statistic known as the duration of sale””i.e., the ratio of housing inventory to the flow of sales. As long as we’ve been collecting these data, there’s never been as dramatic a turnaround in the duration of sales as we’ve seen in some states. With enough investors willing to buy up properties and rent them, housing prices could stabilize in 2010 or even as early as later this year.

Andrew Lo, Harris & Harris Group Professor at the MIT Sloan School of Management

I think that we have good reason to be optimistic that, in the next six to 12 months, the hedge fund industry will lead the charge for creating additional investment opportunities and liquidity for the banks and other more traditional institutions. Although the hedge fund industry as been maligned as the “shadow banking industry,” a bigger problem leading up to the financial crisis was that banks, money market funds and insurance companies began acting as a “shadow hedge fund system” by taking on risks that were inappropriate for them.

Bengt Holmstrom, Paul A. Samuelson Professor of Economics at MIT

Systemic risk is a problem at the heart of the crisis””and, in particular, people overlooked that the securitized products created a kind of risk known as tail risk.  The task of coming up with ways to measure the systemic risk is one of the real intellectual challenges presented by the financial crisis.

James Poterba, Mitsui Professor of Economics at MIT

The U.S. is still an incredibly powerful economic engine, with a remarkably innovative economy. The question, though, is how does the government side of the economy get itself back to a situation which looks more stable as we go forward?  Also troublesome is the fact that the U.S. is an aging economy where the federal government has taken on large commitments to provide health and income benefits to older households. These ingredients lead to a very, very unappealing long-term fiscal outlook.


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