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Nobel Prize Laureate Robert Solow sees limiting leverage as critical element of ‘too big to fail’ policy

March 25, 2010

Speaking to a capacity crowd at Brandeis International Business School (IBS), noted economist Robert Solow advocated limitations on leverage as a key means of ensuring that the financial system continues to perform useful functions for society.

Solow, winner of the Nobel Prize in Economics, argued “excessive leverage appears to be the key destabilizer” which led to the turmoil in global financial markets.  He advocated the need for enhanced government regulations designed to temper aggressive lending practices among banks and financial institutions. “The best way to control ‘too big to fail’ is to control leverage,” he said. “Regulate it closely and be prepared for evasions and loopholes,” he continued.

group

Left to right: IBS Dean Bruce Magid, Robert Solow, IBS professor Gary Jefferson and Senior Associate Dean Tren Dolbear.

Solow urged a global approach in crafting such policies as savvy firms might seek to shift operations to countries with less stringent rules in order to skirt regulations elsewhere. “International cooperation and alignment are necessary in this interconnected world,” he said. “Otherwise there will be a race to the bottom,” he added.

solow and gary

Left to right: Gary Jefferson and Robert Solow.

In introducing Solow, Gary Jefferson, the Carl Marks Professor of International Trade and Finance and Chair of the Economics Department at Brandeis, called him “one of the giants on whose shoulders the economics field stands.”  Solow was awarded the Nobel Prize in 1987 for his contributions to the theory of economic growth.  He spoke at Brandeis IBS after receiving an invitation from his grandson, Lewis Solow-Collins, who is a member of the class of 2013.

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