The Macro Financial Modeling Project’s Summer Session is an annual conference that brings together established scholars and graduate students in economics and related fields who are interested in developing enhanced macroeconomic models with linkages to the financial sector to discuss innovations in the field and present research. Dialogo recently sat down with Lars Peter Hansen, the David Rockefeller Distinguished Service Professor and Director of the MFM Initiatives, to recap this summer’s session.

Dialogo: This was the third summer session.  How did the program begin?

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Lars Peter Hansen

Professor Hansen: We've had this long-standing project now that's been ongoing for about seven years. The first stage of the project was about bringing together elite senior researchers from around the world to interact with people engaged in supporting policy makers. We thought that would be a good place for academics to have a better feel for what challenges were in the policy arena and better direct our attention to the most important projects related to macroeconomics and finance.

After that evolved, the project gradually shifted towards integrating early career scholars, trying to bring young people into this field. It's one thing for senior people to talk about the problems, but future advances will depend on the next generation. So, we began funding their research and inviting them to our events, and along the way, realized that an even more powerful thing would be to hold these summer camps in which we bring together elite researchers with younger scholars, with sessions where the elite researchers to give overall talks about areas of research and the younger scholars could interact with them. It is an exciting evolution of a project that began focused more on senior researchers and has shifted over time to younger scholarship.

Dialogo: What are you most proud of from that shift?

Hansen: It is my understanding that the number of applicants has increased as more and more top scholars in this area have become familiar with the summer session and the MFM community. We were very pleased with the quality of the attendees this year. We now have a reputation for being a good event, something that early career people interested in research in this area want to go to and participate in. We bring in veterans who have experienced previous summer camps to interact with the new people. So, it’s the development of the reputation and, I think, the overall quality of the summer camp as we've gotten more experience that are notable achievements. We're quite happy with both aspects of this.

This year’s MFM Summer Session panel featured elite speakers such as Beverly Hirtle, Executive Vice President Director of Research at the NY Fed with experience in financial market oversight and stress testing, Tao Wang, Head of China Economic Research, UBS Investment Bank with a particular expertise in macroeconomics and finance in Asia, and Richard Sandor, Chairman and CEO of the American Financial Exchange and Professor at the University of Chicago, who has had vast experience in the creation of financial markets. View video here.

Dialogo: What key themes and ideas were discussed this year?

Hansen: Every year we have different orientation and type of themes. This year, we had talks devoted to the role of financial technological development in China and what impacts that has. That was a new twist that we explored this year.

Every year too we've had panels in which we bring together people from government sector and from the private sector. I was particularly pleased with our panel discussion this year. We had Bev Hirtle from the Federal Reserve Bank of New York, who was involved in the oversight of financial markets and the conduct of stress testing, and Richard Sandor, who is well-known for the creation of futures markets. He was chief economist at the Chicago Board of Trade and a prominent figure in how to get such markets going. He's recently written a book on new financial technologies, which include blockchain technologies that underlie things like Bitcoin and the like. We also had Tao Wang, who is one of the chief economists for UBS who brought a more external perspective on some of the challenges. The three of them all had very interesting things to say and had complementary perspectives.

This year, we added interviews with many of the participants, and my understanding is that they all went very well. They were quite insightful. This idea of exposing young people who are graduate students to the challenges coming from these multiple perspectives, the government perspective, and the private sector perspectives, I think can be very useful.

Dialogo: Why is it important that younger scholars interact with established economic thinkers?

Hansen: Many are graduate students, and some are just slightly more senior than that. So instead of a graduate student talking just to their advisors at their own university, they are exposed to a much broader set of faculty. The interactions have the formal aspect of presentations, but there's much informal opportunities - everyone's there together, having meals together, having poster sessions over lunch times – all of which promotes engagement. The structure of the session gives those who are getting started on research connections to a much broader set of people, both peers in the same cohort, people that they could write papers with in the future at other universities, and interact with, as well as senior people from those other places.

Dialogo: What do the elite researchers get out of interacting with the graduate students?

Hansen: What really interests me is having a positive impact on the research of young scholars. I think it's much easier for me to influence younger people than it is to influence people who are in my cohort. In some sense, their brains are already fossilized, maybe mine is, too. But the younger people are the ones who are trying to explore what are new ways to think about things. They're a little bit more open, and they're anxious to learn new stuff. Watching that, the ability to influence young people and help them or encourage them, is something that I personally get value out of, and it's my guess that the other more senior researchers find a similar value.

Dialogo: What advice that you would offer an undergraduate thinking about pursuing economics? Or a graduate student?

Hansen: I always think it's important to find something that you can eventually be enthusiastic about. Yes, you want to be employed at the end of the day, but if you're really good at something, there's lots of different potential employment opportunities. I keep on saying that having passion for what you do is really important. If you ever want to excel for something, you have to really care about it, and you have to be willing to work hard when necessary. There's a variety of different majors out there that can still be platforms to jobs in different areas. Make sure you pick a field that excites you.

I think it's wrong to think of undergraduate programs as just some apprenticeship. I think it's an opportunity to learn a variety of skills. It's very hard to know what aspects of your undergraduate education are going to end up being most impactful.

For graduate students, it's a little bit different. There they've already chosen an area of research, which, of course, they're pursuing.  The graduate students that we're talking about are people who would be in their second year, and many are third, fourth, and fifth year of graduate programs. For them, it’s essential to make sure that you put the efforts to thinking critically about the research in the area. Start thinking about ways you might do things differently. Think about the problem differently in order to make contributions to that area. Again, you have to care about it. Don't go into this unless you really find it fascinating and really willing to work at it. Be wanting to wrestle with potentially hard constructs, but also be willing to think critically about it.

Dialogo: You mentioned this year there was more of a focus on the way technology has come into play in the economic field. Would you expand a bit more on that?

Hansen: This is specifically about financial technologies. Let's take a country like China, which has a fascinating economy. Over the last few decades, China has made enormous strides, but there are also obstacles. There, there are state-owned enterprises and state-owned banks and the like. And the state-owned banking sector has not historically been very good at identifying new, innovative places to make investments, to take new ideas and make them develop.

What's happened is there's been technological developments whereby there are online entities that allow people to engage in financial transactions, maybe to get small loans in order to help them develop ideas, to do so-called peer-to-peer lending arrangements and borrowing arrangements. That has opened up financial activity to a much broader set of the population, not just people that are plugged intostate-owned banks. If you really think about how economies are likely to grow in the future, companies like Apple and Microsoft don't start off as big companies. They start off like ideas inside a garage. People with the creative ideas to be able to get some initial funding is really important to try to provide the so-called engine of growth. In the case of China, too, there are adaptations to the rather clumsy state-owned banking sector These developments in financial technologies have just opened things up to a much broader range of the population. That can be very productive. So that's the fascinating part of it.

From left to right: Sharon Yin, Chase Ross, and Chen Qiu

Here's the part that I may be overreacting to, but I find a little bit concerning. Part of this new technology is the ability to code tons of information on people. Their activities, what they purchase, what they do, what transactions they've done in the past. Now, keeping track of credit histories can make it easier for people to borrow if they're credit worthy, but more generally, if you keep track of behavioral aspects, it opens the door to privacy getting lost and to potential abuse, even by governments.

Part of the challenge of this is the social challenge. Do we give up on privacy? Do we protect it? How do we protect it? Every new technology there are these great opportunities, but there's also stuff you have to watch out for. So it's the watching out for that I think is also fascinating. But these ideas are just part of what we explored at this summer camp, and again, in terms of new type of topics, I think that was probably one of the ones that was newer relative to previous ones.

Dialogo: Were you thinking beforehand about how technology is coming into play?

Hansen: Yes. I've been to China multiple times, and it comes into play there. Of course, you had the Facebook scandals here and other instances where information gets unloaded and identity theft occurs. As a personal example, the Social Security Administration has once almost, and a second time issued checks to somebody who claimed to be me for retirement benefits through some bogus bank, through some bogus bank account. It's not just governments you have to watch out, it's smart people hacking systems and the like, too, that's also issues. So there's all sides of it there just fascinating. I'm not sure I have all the answers, but I think it's important to probe them because these are going be important for society going forward.

MFM project co-directors, Lars Peter Hansen, University of Chicago, and Andrew W. Lo, MIT discuss the value of this student-targeted camp. View video here.

Dialogo: Did anything at the summer session changed your perspective on the way you think about financial technologies?

Hansen: Some of the talks were quite good at showing some of the benefits to it that I hadn't fully internalized and hadn't fully grasped. Seeing that play out in more detail was quite interesting. I find it fascinating also to listen to Richard Sandor. As I mentioned earlier, he has had tremendous success in creating markets, financial markets in this case, these so called financial derivatives. But he's also had failures. A lot of attempts at markets, financial markets, don't succeed, and so there are lessons to be learned there as well. He was one of the first people putting together a market related to climate, trying to trade emissions claims so that. different companies, in order to emit more, have to pay somebody else to emit less as a way to try and control the impact of the climate. There were very innovative ideas, but there was no way to impose these constraints on firms and the participation was all voluntary. Initially, it had some appeal. I think firms would participate just because it would generate some good will, but then it eventually just failed.

Now, his ideas about how to create such markets in the future are going to be important, and there are lessons to be learned. Understanding more about markets that take off versus ones that fail, I think, is quite interesting.

Tune into BFI's YouTube channel for more conversations with Richard Sandor, Tao Wang, and Bev Hirtle.

Dialogo: What are some hopes you have for future sessions?

Hansen: That we can continue to encourage young scholars in this area, to expose them to the best ideas and also to let them know there's a whole community of other people, including people in their own cohort, working on similar problems.

To read more about Professor Hansen’s thoughts on the summer sessions, visit HERE.