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MIT Sloan Throughout the Crisis: Leading the Conversation

Johnson, Lo, and Kochan(L-R) Prof. Simon Johnson,
Prof. Andrew Lo, Prof. Tom Kochan

The MIT Sloan community has always played a key role in shaping the world’s understanding of economic conditions, but no time in recent memory has their leadership been so needed and welcomed as it was after the onset of the global economic crisis in 2008. With the collapse of Lehman Brothers and Merrill Lynch heralding an unprecedented period of economic hardship and panic around the world, MIT Sloan leaders Simon Johnson, Andrew Lo, and Tom Kochan continued working not only to shape economic policy on Capitol Hill, but also to help educate and advise the public at large through network television interviews, newspaper editorials, and blogs rich with the kind of insight and information for which the world so hungered.

Simon JohnsonSimon Johnson, Ronald A. Kurtz (1954) Professor of Entrepreneurship

Simon Johnson: Blogging the Answers

Simon Johnson, who has held the Ronald A. Kurtz (1954) Professor of Entrepreneurship chair at MIT Sloan since 2004, and is currently a senior fellow at the Peterson Institute for International Economics in Washington, D.C., is no stranger to issues of financial turmoil. His ability, in manner and content, to communicate and dissect the complexities of today’s economic challenges has been invaluable to helping other experts, students, and the public better understand what led to crisis, and what will lead us out of crisis.

Over the past 20 years, as an academic, a policymaker, and while working in the private sector as well, Johnson has built a reputation as one of the world’s foremost crisis experts. In 2000 - 2001, he was a member of the U.S. Securities and Exchange Commission’s Advisory Committee on Market Information. He has worked with many leading research organizations and has helped in the struggle for crisis prevention and recovery in countries both rich and poor. From March 2007 through the end of August 2008, Johnson was chief economist at the International Monetary Fund (IMF), where he helped formulate responses to worldwide financial turmoil. So it seemed only natural, as the financial situation in the United States continued to grow increasingly dire, that his voice would rise to the top of the ensuing discussion and debate.

Cited in The Wall Street Journal, The Economist, The Financial Times, and NPR’s Planet Money, the Web site Baselinescenario.com — which Johnson co-founded with former McKinsey consultant James Kwak — is seen by many as the place to go for timely economic advice. And much of the site’s popularity has to do not only with the precision of its scholarship, but also with the honesty of its conversational tone — a tone Johnson says he began to develop at the IMF, where he was the first chief economist to have a blog. “The IMF has meetings in the fall and in the spring,” he says. “For a couple of weeks around those meetings, there is always a lot of intense activity, and a lot of interest about what the IMF is saying about the global economy. Since I was responsible for developing and presenting the IMF’s global forecast, I used the blog to get that information out to the public.” Over time, Johnson says he began to develop a style, which he describes as “chatty but not ranting,” and that style, or perhaps a more outspoken and pointed version of that style, survives today with Baselinescenario.com.

Simon JohnsonSimon Johnson has testified before Senate Budget Committee and Joint Economic Committee.

One of the purposes of the blog is to influence policy, he says, but to do so in a more measured and diplomatic way than mainstream media often allows. “If you want to change people’s minds,” Johnson explains, “the best thing to do is not to shout at them, but to politely and firmly pursue a line which is contrary to what they are doing and hope eventually to bring them along with you.” The blog, he says, has been a great tool for this end largely because the public and journalists alike can sense they are being given an unvarnished view of the world. “We use the blog as a means to craft a message while being very explicit about how the message changes over time,” he notes. “We try to be very honest with ourselves. Every six weeks, we put out The Baseline Scenario, which is our big, integrated view of the world, and the posts in between consist of our updates, validations, or changes to that baseline. And journalists like that kind of honesty.”

Over the past 20 years, as an academic, a policymaker, and while working in the private sector as well, Johnson has built a reputation as one of the world’s foremost crisis experts. In 2000 - 2001, he was a member of the U.S. Securities and Exchange Commission’s Advisory Committee on Market Information. He has worked with many leading research organizations and has helped in the struggle for crisis prevention and recovery in countries both rich and poor. From March 2007 through the end of August 2008, Johnson was chief economist at the International Monetary Fund (IMF), where he helped formulate responses to worldwide financial turmoil. So it seemed only natural, as the financial situation in the United States continued to grow increasingly dire, that his voice would rise to the top of the ensuing discussion and debate.

But perhaps more important is the fact that Baselinescenario.com is also a valuable educational tool for the general public, allowing access to the kind of timely knowledge and information that is so crucial to maintaining a stable economy. Included on the main page of Baselinescenario.com is a section entitled “Financial Crisis For Beginners,” which provides less informed readers, or even experts who just want to brush up on their facts, with a wealth of information about the state of the world economy. Likewise the section entitled “For The Classroom” gives resources and materials for teachers at all levels to utilize in their own classrooms. All of this, Johnson says, helps lay the foundation for a more transparent and stable economy. “One thing that we do well at MIT Sloan,” Johnson says, “is take expert opinion and put it in terms that non experts can not only understand but also relate to. My goal in all my teaching is to talk about economics without drawing supply and demand graphs on the blackboard or relying on mathematics. So, in a sense, that is a natural preparation for this role we are now playing, which is somewhere between public educators and advocates for what we regard as sensible policies.”

Andrew LoProf. Andrew Lo

Andrew Lo: New Responsibilities

Another leading voice within the MIT Sloan community is that of the Harris & Harris Group Professor of Finance, Andrew Lo. A former governor of the Boston Stock Exchange, Lo is currently a research associate of the National Bureau of Economic Research, as well as a member of the National Association of Securities Dealers’(NASD) Economic Advisory Board. Lo’s research into human reaction to risks and rewards and human instinct better illuminates people’s behavior in a financial crisis.

Lo earned a PhD in economics from Harvard University in 1984, after which he went on to teach at the University of Pennsylvania’s Wharton School until 1988. His research has focused on financial engineering and risk management; hedge-fund risk-and-return dynamics and risk transparency; as well as evolutionary and neurobiological models of individual risk preferences and financial markets. Currently, he is an associate editor of the Financial Analysts Journal, The Journal of Portfolio Management, the Journal of Computational Finance, and Statistica Sinica. He is also a co-author of The Econometrics of Financial Markets and A Non-Random Walk Down Wall Street, and author of Hedge Funds: An Analytic Perspective.

Exploring the link between financial decision making and neurobiology, Lo’s research provides valuable insight into the ways certain evolutionarily hardwired reactions to risks and rewards can affect the way people do business in times of crisis. A lot of it, he explains, has to do with fear, especially fear of the unknown. When a person is faced with an event he or she does not understand, he says, they tend to rely on instinctual responses, which can generate all sorts of seemingly irrational behavior. In the case of the sub prime credit crisis he believes it was the lack of transparency that allowed the problem to become as large as it did, because investors were left to rely on their fears and imagination. “Instinct,” he says, “is something by definition that is hardwired. In certain cases, it can keep us alive; but in other cases, it is absolutely deadly.” To know the difference we need access to definitive information.

Andrew LoProf. Andrew Lo

A good example of this kind of transparency can be seen in the events that followed the crash of U.S. Air Flight 1589 into the Hudson River in January of 2008. “After that incident, the country could easily have descended into a mass panic,” he says. “Rumors could have started floating around that it was a terrorist attack — that Al-Qaeda had sabotaged one of the engines. But that didn’t happen . The National Transportation Safety Board has a well-oiled machine that reacts very quickly, descending on a site and taking control of all communications to provide information to the public immediately. This way, the press doesn’t have to report rumors, and this calms people’s fears.”

It is hardly surprising then that Lo sees education as a key element in maintaining a more stable worldwide economy, not just at the university level, he says, but all the way down to high school and even junior high school. “There has always been a tension between rational decision making and emotional reactions,” he explains. “The way that humans are able to constrain their emotional tendencies, their fear and greed, is through the cold light of logic and understanding.” To this end Lo has repeatedly made his vast experience and expertise available wherever it was needed. Whether it was giving a presentation at the Brookings Institute, organizing a standing-room-only presentation on the MIT Sloan campus, or presenting his research to the Congressional Oversight Committee, he has made himself not just an expert on the crisis, but also a part of the solution.

“I think that is a responsibility of every higher educational learning institution,” he says. “It has been very heartening to see colleagues here and at other universities be prepared to spend as much time as necessary. We have all been very fortunate to live in a country that has been so successful, with so much wealth. So we need to do what we can — this is the least we can do.”

imageProf. Tom Kochan

Kenneth Kochan: The Voice of the Workers

Tom Kochan, the George M. Bunker Professor of Management at MIT Sloan, has focused his career largely on America’s outdated work and employment policies. Kochan’s understanding of the relationship between labor and management in this country has made him a leading voice in a widespread financial crisis that will require many changes in the practices of each before recovery will be possible.

As co-director of the Institute for Work and Employment Research (IWER), and through extensive research and publication, including his latest book, Restoring the American Dream: A Working Family’s Agenda for America, Professor Kochan has called attention to the new challenges facing working families. Again and again, he has stressed the need for fundamental change in established employee and labor-management relationships. He says the economic crisis only made him redouble his efforts to bring labor and management together, seeing it as a crucial component to a successful recovery.

“We simply are not going to have a sustainable recovery if we don’t apply some of the lessons we’ve learned over the years about the need for more cooperation at the workplace. Dialogue about minimizing layoffs and what kinds of changes should be made in terms of both work practices and public policy just has to happen at the level of the firm.” Looking back to the 1981 - 1983 recession, Kochan points to the work of Donald Ephlin, one of the most innovative labor leaders of the day. By agreeing to significant wage concessions in return for the commitment to innovation that led to the creation of the car company Saturn, and the joint venture between GM and Toyota called NUMMI, Ephlin was able to bring a number of U.S. automakers back from the brink of bankruptcy. “The same type of leadership and innovation are still needed today,” Kochan says, “[along with] a willingness to accept short-run pain for a commitment to long-term innovation.”

imageProf. Tom Kochan

Building trust is crucial, he notes, but it has to be a sustainable trust. If labor and management don’t take advantage of each other during good times, they can’t draw on that trust later in times of crisis. This does not always happen naturally, however. It takes leadership and courage. History suggests that when called upon, business and labor will not only will help in times of crisis, but also will lay the foundation for a sustainable recovery.

“We have to teach about the dignity of work,” he says, “and the dignity of workers. We have to show our students the fiduciary responsibilities as well as the stewardship responsibilities that management has. We have to lead organizations in ways that protect the long-term interests of the firm and those of the employees, communities, and suppliers who contribute to the firm. This way, we can really start talking about building sustainable organizations, sustainable not only in the environmental sense, but sustainable on a social dimension as well.”