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Ken Scott Speaks On Economic Crisis

Publication Date: 
February 18, 2009
The Stanford Daily
Joanna Xu

The Stanford Daily interviews Professor Kenneth E. Scott about the current economic crisis and how the government should respond:

Ken Scott ’56, professor emeritus of law and business, is a leading scholar in the fields of corporate finance reform and corporate governance, and has commented widely on the financial crisis. The Daily spoke with Prof. Scott about the reasons behind the financial crisis, who is at fault and how the government should react.

The Stanford Daily (SD): Who in your opinion got us into this mess? The media has been ragging on the finance industry and blaming them for taking too many gambles and not doing proper risk management. But many economists are saying that the government is at fault too for keeping interest rates so low for so long and not regulating the finance industry enough. Where do you think the spectrum of fault lies?

Ken Scott (KS): This is the subject on which I’m giving a talk in Tokyo in a few weeks. The title of it is “The Panic of 2008 - a Perfect Storm?” A number of factors came together.

When you start asking why, it can be infinite regress. You can go back almost indefinitely; to pick a starting point, I would pick two events: one would be the response of the Fed to the dot com bubble bust in 2001. Then, the stock market dropped and there was a fear that this [might lead onward]. The Fed was looking at what happened in Japan from 1989, the Japanese bubble burst. It lasted the better part of 10 years. They actually moved into a period of deflation, no lending and no growth and so on. The Fed reacted very strongly to that fear. Whether it was realistically that big a threat or not is another better. They moved from 5.5 percent to 1 percent Fed Funds Rate in a year and a half. The real cost of money was negative once you factored in inflation; you were getting free money if you borrowed from the Fed.