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'02 Nobel Prize winner speaks about economy and housing

staff writer

Published: Thursday, November 14, 2013

Updated: Thursday, November 14, 2013 00:11

Vernon Smith

Meghann Nixon

Nobel laureate Vernon L. Smith speaks to the Huntsman School of Business on Wednesday.

The Orson A. Christensen Auditorium was packed Wednesday as Nobel Laureate Vernon L. Smith spoke about how the price of one’s house correlates with the health of the economy.

Smith spoke as part of the George S. Eccles Memorial Lecture in Economics. The Huntsman School of Business invites distinguished guests speaking as part of this memorial lecture, which also celebrated its 40th birthday Wednesday. These guests included Nobel Prize winner Peter Drucker, author Milton Friedman and former chairman of the U.S. Federal Reserve, Alan Greenspan.

Smith was awarded the Nobel Prize in economic sciences in 2002 for his work in experimental economics. He authored and coauthored more than 280 articles and books on capital theory, finance, natural resource economics and experimental economics. He is the president and founder of the International Foundation for Research in Experimental Economics.

Randy Simmons, a professor of political economy, has known Smith since 1983. He said the most significant thing Smith has done is his invention of a new field of economics.

“He tested economic theory in his lab — how people will react,” Simmons said. “He created real world markets among students in his classroom. It has grown to have a huge impact on how economists think. Are assumptions in human nature correct?”

Simmons continued, “Besides, he’s a really nice guy.”

Smith spoke on the Great Recession as a household-bank balance sheet crisis and the Great Depression as a household/bank balance sheet crisis. He also talked about housing as the U.S. business cycle and as a leading indicator in 11 of the last 14 recessions, but only the Great Depression and the Great Recession as balance sheet crises.

Also, he described why stock market crashes do not bring recessions and achieving escape momentum from recessions with many damaged household and bank balance sheets. This is not achieved by monetary expansion or by government deficit spending, he said.

Looking at a graph of percent changes in gross domestic product and components from 2003-10, Smith said nondurable consumption is most stable.

“This story is not new,” Smith said. “It’s very, very old.”

Imbalance in the depression was fueled by a massive flow of mortgage credit, Smith said.

This is what economist Adam Smith described as “too much of other people’s money,” to which Smith shorted to OPM.

Housing led in 11 of the past 14 recessions, Smith said. Only the last recovering in 14 recoveries occurred without housing.

On why stock market crashes do not cause recessions, Smith said stock market excesses are constrained by margin requirements and limited investor use of OPM. Property rights limits on OPM combine with “call” feature of loans internalizes the primary damage from crashes. Households and banks generally are not seriously impacted.

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