Myron Scholes at McMaster

The McMaster Alumni Association celebrated the 50 years of graduation for the class of 1962 by inviting their most distinguished alumnus back to campus.

I attended the luncheon in his honour, where he treated us to personal recollections of his time as a student at McMaster and some insights on the future of economics. At question time I asked if he thought new techniques were necessary to deal with what I call mesoeconomic problems, such as banking regulation, which do not easily fit into either micro or macroeconomic toolboxes. He said "Yes, sure" and proceeded to explain an Ornestein-Uhlenbeck model for production, with a mean-reverting rate that had to be adjusted after each macroeconomic shock. Okay...

At the public talk that followed, Myron accurately diagnosed the current economic woes of the world as a "debt-deflation" crisis, with all the symptoms associated with it. His prescription, however, was to get the government out of financial markets altogether. He used the analogy of putting out small forest fires for many decades only to discover that the practice created the perfect conditions for uncontrollable big fires.

Now, apart from the obvious fact that this means that Greenspan should NOT have orchestrated the bailout of LTCM (something everyone in the room was too polite to point out), the prescribed medicine happens to be the opposite of what the doctor should call for given the correct diagnoses.

But oh well, it was a day to celebrate, not to get bogged down in technical discussions.