Final Exam

Just a reminder: the final exam is Monday, December 14th, at 4:45 p.m. in our normal classroom. It should take about an hour to complete it, but you'll have two hours to take it just in case.

Paper Guideline

UPDATE: New due date!

Due Date: at the beginning of class on Wednesday, December 9th, Monday, December 14th, 2009

Worth: 15% of your overall grade

Length/Format: Papers must be typed, and must be no more than 1200 words long. Also, you must cite at least two sources. I do not care how you cite them; just cite them in a way that I can find your sources if I have to.

Assignment: Write an essay in which you explain and defend your answer to the following question:

What, if anything, does last year's financial crisis show about the ethics of the capitalism?

• First, briefly explain your understanding of what happened that led to last year's subprime mortgage collapse and ensuing financial crisis. In your opinion, what caused all this? Consider multiple possible hypotheses, and explain and defend why your explanation is a better hypothesis than the other ones.
  
• Next, explain what you think this explanation of the crisis tells us about the ethics of the economic system of capitalism. Should we blame the free market for last year's collapse? Or should we blame too much government regulation? Or is something else to blame? Be sure to fully defend your opinions.
  

This paper requires some research. That is, in answering your question, you should try your best to figure out what actually happened to cause last year's financial crisis. This will be difficult, since there are several competing hypotheses that various experts and non-experts endorse. You should do your best to become familiar with these various proposed explanations. (As stated above, for this paper you must provide citations of at least two sources... and I recommend researching and using a lot more than that!)

In addition to your research, though, I want you to demonstrate your critical thinking abilities. Don't simply accept someone's theory because it's published in a fancy newspaper or magazine. Evaluate the reasons they offer in support of their proposed explanation. Choose the explanation that you think is most likely to be true given the evidence at your disposal, and defend your choice.

Here are some links to get you started.

What happened? Explainers:

• A brief explanation and how it spread (Economics Help blog)
  
• The subprime mortgage crisis (This American Life)
• Law professor Michael Greenberger's explanation of the mortgage crisis (Fresh Air)
• The larger financial fallout from the mortgage crisis (This American Life)
• Greenberger's explanation of the fallout (Fresh Air)
• Why Lehman Brother's failure hurt so much (Slate)
• The financial crisis: a play in 6.5 acts
  

What caused the crisis? Hypotheses and rebuttals:

DEREGULATION THEORIES

• Too much trust in free markets! (economist Paul Krugman) ...economist David Levine's response to Krugman
• I used to trust free markets, but now I don't (judge Richard Posner) ...an interview with Posner
• Blame free market capitalism! (Slate)
• Blame Reagan's deregulation! (journalist Jeff Madrick)
  
• We need more regulation! (economist Robert Pollin)
  
  FREE MARKET THEORIES
  
• It wasn't deregulation, it was bad regulation (historian Niall Ferguson)
• Too much trust in economist's formal models! (economist David Colander)
  
• Poor corporate governance & too much reliance on ratings agencies! (historian Charles Calomiris)
  
• It wasn't irrationality, or bonuses, or capitalism... it was regulation! (political scientist Jeffrey Friedman)
• So many myths, but the real story is regulation! (economist Arnold Kling)
  
  OTHER THEORIES
  
• Debate: Wall Street vs. Government (various)
• Overconfidence! (journalist Malcolm Gladwell) ...more thoughts on the 'Overconfidence!' hypothesis
  
• Capitalism's inherent instability! (economist Hyman Minsky) ...the free market response to Minsky

Course Evaluations

As you may have heard, course evaluations are now being done online. Here are instructions to do this for your Fall 2009 classes:

1. Go to http://cp.rowan.edu/cp/.

2. Click "Student Self-Service" icon.

3. Click "Access Banner Services - Secure Area - login Required."

4. Enter User ID and PIN.

5. Click "Personal Information."

6. Click "Answer a Survey."

7. Click on one of the student evaluations for your classes.

8. Complete the student evaluation.

9. Click “Survey Complete” to submit your completed student evaluation.

10. Repeat for other Fall 2009 classes.

CEO Pay

So the article we're reading for class argues that the root cause of the increase in CEO pay is the ratcheting from unrepresentative "peer-group comparisons" of similarly qualified CEO's at other companies. For some reason, overpaid peers stand out more.

This highlights the similarity between the inflated pay of CEO's and star athletes. There's been a rapid rise due to a small minority of shareholders/owners overpaying for a few CEO's/athletes, which has inflated the competitive value for similarly skilled CEO's/players. This ratcheting system doesn't seem financially justifiable for two reasons: (1) top CEO's/players today probably aren't 10 times more valuable than top CEO's/players from 50 years ago; and (2) top CEO's/players probably aren't 100 times more important to their organization than the average employee/player they work with.

Economist Robin Hanson points out a recent paper that extends this analogy between CEO's and athletes. He also compares CEO's to actors and musicians by focusing on the high cost of trying out new CEO's, along with the prevalence of short-term deals. The few short-term winners renegotiate at much higher terms, and are free to continually renegotiate their salaries into the stratosphere. Hanson suggests agreeing to more long-term deals at the beginning to help solve this problem.