SIPA Magazine

In Crises, a Source of Strength

By Stephen Kurczy
Posted Oct 11 2021
In Crises, a Source of Strength

When the pandemic-induced global economic crisis hit in 2020, Lacey Robbins MPA ’15 found herself on the frontline response—not in a blue hospital gown, but in helping oversee the world’s supply of greenbacks.

In downtown Manhattan at the Federal Reserve Bank of New York, Robbins was working in Global Currency Services, which focused on shipping US banknotes all over the world. Foreign governments and banks were rushing to get hold of dollars—similar to how households were stockpiling toilet paper—and Robbins was on the lookout for trouble spots. She was familiar with previous market crises from studying at SIPA with Professor Guillermo Calvo, a former chief economist of the Inter-American Development Bank dubbed the “prophet of financial doom” for predicting Mexico’s 1994 peso crisis. Such courses had also given Robbins an understanding of what central bank levers might be pulled to alleviate the economic pain from COVID-19 as the world went into lockdown, plane flights were grounded, and global logistics for the hard currency that the Fed paid out to customers were disrupted.

“There are so many aspects that play off of each other,” says Robbins, who had wanted to work for America’s central bank ever since she read Maestro: Greenspan’s Fed and the American Boom as a high schooler. Without what she learned at SIPA, she adds, “I would be lost in these discussions.”

‘The day after the crisis, who walks in?’

At the beginning of this century, economic crises were considered a thing of the past in advanced economies. It was thought that the United States and other developed nations had implemented policy frameworks that protected them from financial meltdowns.

“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient,” said Alan Greenspan, who served as chair of the Federal Reserve Board for two decades, in 2004.

That presumption has been overturned. Between 2007 and 2020, global economic crises twice ground markets to a halt, causing tens of millions of job losses and trillions of dollars in damage. Global gross domestic product declined by $9 trillion in the fallout from COVID-19—the equivalent of having the combined economies of Japan and Germany erased.

The financial turmoil has required an all-hands-ondeck response from governments and policymakers, with central banks and finance officials exercising extraordinary powers. In response to the 2007–09 crisis, the Federal Reserve lent $1.2 trillion and purchased over $3 trillion in US Treasury and agency securities, actions widely called unprecedented. During the pandemic the Fed, like other central banks around the world, massively expanded its balance sheet again, underscoring how central banks have become more influential, prominent, and active, with SIPA faculty taking on key roles. For one, Richard H. Clarida, the C. Lowell Harriss Professor of Economics and professor of international and public affairs, is the No. 2 official at the Federal Reserve.

These crises have in turn made the profession of central banking all the more important. To meet that new reality, SIPA has bolstered its curriculum, adding courses and hosting high-level events with academics, policymakers, financial professionals, and practitioners serving on the economic front lines. In 2015 Dean Merit E. Janow spearheaded an initiative on central banking and financial policy, tapping Patricia C. Mosser as its director. The initiative brings together thought leaders from around the world in a unique collaborative effort to shed new light on how central banks and policy institutions can improve the functioning and stability of the global financial system.

“The day after the crisis, who walks in?” asks Mosser, who also directs SIPA’s MPA in Economic Policy Management program. “Which institution decides to lend huge amounts to the financial system, not only in the US but also to the rest of the world? When the financial crisis hits and the economy goes crazy, the central banker’s tools, such as lender of last resort and asset purchases, are already sitting there.”

‘A major innovative part of the curriculum’

When Mosser joined SIPA in 2015, she helped create eight new courses on financial policy and regulation, including her own, Unconventional Monetary Policy, which analyzes how central banks respond to economic crises. Whereas traditional monetary policy mainly uses interest rates to target inflation, unconventional policy in times of crisis includes quantitative easing, purchasing private assets, and negative interest rates—all tactics employed by various governments in response to COVID-19.

Mosser also launched the annual SIPA Bank Regulation Research Conference and a monetary policy workshop cosponsored by the Federal Reserve Bank of New York, though the latter was canceled in 2020 because of the pandemic. In its place Mosser, together with Professor Takatoshi Ito, organized the webinar series Central Banking in the COVID-19 Era, which included a discussion between former Fed chair Janet Yellen (now secretary of the US Treasury and a SIPA Global Leadership Award recipient in 2018) and Haruhiko Kuroda, governor of the Bank of Japan. Other webinar speakers included the current or former governors or deputy governors of the central banks of Brazil, Cyprus, India, Malaysia, Thailand, the UK, and the US, as well as senior financial regulators, speaking in real time about the world’s response to COVID-19.

“The fact is that we’ve had two completely different global financial crises [this century] with extraordinary central bank policy actions, so better understanding of those actions is absolutely critical to understanding how monetary policy on the whole works and how to design better policies,” says Mosser. “Those kinds of analyses will be a major innovative part of the curriculum.”

Many SIPA faculty bring their real-world experience into these discussions. Ito, a former deputy minister of finance for Japan who also served on the prime minister’s Council on Economic and Fiscal Policy in the 2000s, was an informal spokesman for Abenomics, the policy of Prime Minister Shinzo Abe to combat stagflation and make the economy more competitive. José Antonio Ocampo was finance minister of Colombia in the 1990s, then led the UN Department of Economic and Social Affairs, and recently served on the board of directors of Colombia’s Banco de la República, the country’s central bank.

Then there’s Willem Buiter, a special economic adviser to Citigroup who was previously on the monetary policy committee of the Bank of England. Richard Robb, director of the International Finance and Economic Policy concentration, is CEO of the investment management firm Christofferson, Robb & Company. And one of America’s most prominent voices on progressive economics is Joseph E. Stiglitz, University Professor, a Nobel laureate, former chair of the White House Council of Economic Advisers, and former chief economist at the World Bank. The author of more than 600 papers and books, Stiglitz has been a strong critic of America’s rising income inequality, on stark display in the pandemic’s disproportionate impact on poor communities. He has also been a key backer of the Green New Deal, a sweeping plan for the US to reduce fossil fuel consumption and invest in clean energy.

Mosser’s own background informed how she helped build out SIPA’s curriculum. In 2007 she was a senior manager at the New York Fed overseeing market analysis and monetary policy implementation when financial markets and commercial banks came under pressure from the subprime mortgage collapse. Mosser was responsible for setting up and operating swap lines with more than a dozen central banks around the world—something never done before—allowing other central banks to pump hundreds of billions of dollars into the global economy. The move highlighted how, as she would later write, the Fed “is ultimately the only entity with the ability and the mandate to provide essentially unlimited emergency [US dollar] liquidity when the financial system is under extreme pressure.”

To bring such real-world experience into the classroom, visiting professor Jacob J. Lew, for one, tries to put students in the shoes of policymakers. Lew, who served as secretary of the US Treasury as well as White House chief of staff and director of the Office of Management and Budget, introduces case studies (such as the Puerto Rican financial crisis) on which students must quickly get up to speed. They then present a policy brief, which requires deep analysis, effective communication, and action in the face of incomplete information.

“In a perfect world, we would know everything and have a complete analysis,” Lew says. “In the real world, you have to make decisions when you have to make decisions. You have to do the very best with what you have.” And doesn’t that encapsulate the challenge in responding to a crisis like COVID-19?

‘My quota of patriotism’

Faculty have also played crucial roles in the response to the latest economic crisis. Richard H. Clarida, who has taught at SIPA for more than three decades, is on leave while serving as vice chair of the Federal Reserve Board, responding to what he has described as “the most severe blow to the US economy since the Great Depression.” A respected scholar with market experience as a global strategic adviser for the investment giant Pimco, Clarida is part of the troika that leads US monetary policy, alongside the Fed chair and the New York Fed president.

Also active is adjunct professor Augusto de la Torre, who was governor of Ecuador’s central bank in the 1990s and later the World Bank’s chief economist for Latin America and the Caribbean. He advised the Ecuadorian government on restructuring its debt in 2020, when the oil-exporting country was slammed by both COVID- 19 and plummeting energy prices. One of de la Torre’s students, Bernardo Orellana Heredia MPA-EPM ’18, was recently named vice minister for the Ecuadorian Ministry of Economy and Finance—underscoring how alumni are also playing important roles in the world’s economic recovery from COVID-19. He is trying to bring higher standards of transparency and accountability to the department.

“It’s inspiring to think that we can really change how history goes for this country,” says Orellana, who took a pay cut in leaving the private sector to work for the government. “I see it as my quota of patriotism.”

One of Orellana’s favorite courses at SIPA was taught by adjunct professor Gray Newman, a former chief Latin America economist at Morgan Stanley who closely followed the region’s fiscal turmoil in the 1990s. In the classroom Newman walked Orellana through those crises, instilling lessons that guide him today.

Orellana remains in touch with SIPA faculty and alumni, sometimes unexpectedly encountering them across the table. “In a couple of cases, I have met with people in the IMF and World Bank, and some people have come from SIPA,” Orellana says. “It’s a good starting point when you know the other person in a professional relationship.” With nearly 300 SIPA alumni in more than 50 countries working in central banking, including many at the Federal Reserve, these types of professional interactions are not uncommon. The network is strengthened by SIPA’s Center on Global Economic Governance (CGEG), founded by Jan Svejnar, the James T. Shotwell Professor of Global Political Economy, who organizes an annual roundtable of central bank governors. CGEG also hosts an annual summit with the World Bank to discuss the draft of the World Development Report before it is published.

Svejnar himself was part of the COVID-19 response in his native Czech Republic, advising the government on economic policy, urging the central bank to lower interest rates, and pushing for tax forbearances. One of Svejnar’s concerns has been how to prevent the pandemic from widening the wealth gap, an ongoing focus of his research.

“What we saw during the pandemic is that the distribution of wealth became even more uneven,” says Svejnar, coauthor of a widely cited 2015 study that found ultra-wealthy individuals aren’t good for a country’s economic growth. “There were a lot of people who lost, and the ones who gained were at the upper distribution of income and wealth.”

Whereas past economic crises from Puerto Rico to Ukraine were assumed to include widespread financial pain, the response to COVID-19 has shifted the emphasis to alleviating the pain for those hit hardest on the margins, notes former Treasury secretary Lew.

“How do you ensure that you take considerations of economic equity into account as you’re making policies?” he asks. Lew hopes this question of equity will play a growing role in policymaking.

‘A source of strength’

How do you teach crisis response to an international student body when every economic crisis, almost by definition, is different and every government responds differently?

“If every crisis is different and they only happen every so many years, you can’t just pull out a playbook,” Mosser says. “You have to look carefully at the details to understand why and how central banks made the decisions they made. Why was it right or wrong? Why was it good or bad public policy? What could have been better? How do you do the best public policy you can do given the tools that you have?”

That ability to synthesize information, think creatively, and work with people from different backgrounds— hallmark traits of SIPA graduates—is vital for central bankers, says Stefan Walter MIA ’91, director general of the European Central Bank, where he oversees risk monitoring of the 120 largest banks in Europe. Previously, Walter was secretary-general of the Basel Committee on Banking Supervision that passed the Basel III reforms, credited with helping prevent the COVID-19 recession from escalating into a yearslong economic depression. Skills he absorbed at SIPA pertaining to power negotiation and political dynamics helped him navigate the complex Basel process, Walter says.

“In hindsight, we were so lucky that we had the financial crisis of ’08–’09,” he says. “Had we gone into COVID with the banking and financial system of ’08–’09, we could have ended up in a Great Depression. It’s unimaginable.”

“Banks were a source of strength in this crisis,” Walter adds, though he notes that there’s room for improvement in governance, risk management, and banking culture.

Mosser points out that many central banks, including the Federal Reserve, referred to the playbook from the 2007–09 financial crisis to recreate lending programs to address the speed and severity of the economic fallout from COVID-19. “The fact that we had a shock like COVID and the global financial system is still running,” she says, “shows that the post-2007–09 reforms worked.”

Not that it’s necessarily clear skies ahead. In Svejnar’s words, it’s “a nonzero probability” that we’re in for more economic turbulence.

“Nobody is able to easily foresee these kinds of issues and problems arising,” Svejnar says. “To the extent that we can have policies that would be effective in a particular situation, we should train students and prepare ourselves for that.”

This story appears in the most recent issue of SIPA Magazinepublished in October 2021.