Thomas Jordan: Seventh Karl Brunner Distinguished Lecture -
introduction of Markus K. Brunnermeier
Text of the Seventh Karl Brunner Distinguished Lecture by Mr Thomas Jordan,
Chairman of the Governing Board of the Swiss National Bank, Zurich, 28 September
2023.
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Ladies and Gentlemen
I am very pleased to welcome you all to the seventh Karl Brunner Distinguished
Lecture. We are delighted and honoured that Professor Markus Brunnermeier has
accepted our invitation to give this year's lecture. I also want to thank the ETH Zurich
and its President Joël Mesot for their hospitality.
The Swiss National Bank established this annual lecture series in honour of the Swiss
economist Karl Brunner, one of the leading monetary economists of the last century.
Our aim with these lectures is to reach a broad audience, and to contribute to the public
debate on issues related to our mandate.
Markus Brunnermeier is an ideal person to hold the Karl Brunner Lecture. Markus is the
Edwards S. Sanford Professor of Economics at Princeton University and director of the
Bendheim Center for Finance. His research is of great relevance for central banks. This
includes work on systemic risk in the financial system, price bubbles in stock markets,
liquidity crises, and digital currencies.
In addition to being an outstanding scholar, Markus is a role model when it comes to
cultivating the dialogue between academia and the general public. The voices of
academic economists are vital for sustaining a productive public debate on the major
economic issues of our time. Markus takes this responsibility very seriously. He has the
rare gift of being able to reduce complex issues down to the essentials without
compromising academic standards. This is one of the reasons why Markus was
awarded the Deutsche Wirtschaftsbuchpreis for his book The Resilient Society, as well
as the Ludwig-Erhard-Preis für Wirtschaftspublizistik for his contribution to informed
public debate.
It was not always obvious, however, that Markus would become a world-renowned
economist. Growing up in Landshut, Bavaria, his career seemed mapped out for him:
He was to take over his father's carpentry business. As we know, Markus ended up
taking a very different path in life. Nonetheless, his observation that he has probably
hammered in more nails than any other economist may well be true! Be that as it may,
rather than taking over the family business, Markus completed his Abitur via the
socalled 'zweiter Bildungsweg' and began studying economics at the University of
Regensburg. After only two years there, Markus moved to the US, where he earned a
master's degree in economics from Vanderbilt University. A few years later, he
completed his PhD at the London School of Economics. Markus was then appointed
assistant professor at Princeton University. In 2006, he was promoted to full professor.
Much like a carpenter spotting a leak in the roof, Markus has a keen sense of where
additional research is most needed. Whenever economists lack good models for
analysing current developments, Markus tries to close these gaps. A defining event
early in his career was the dot-com bubble. In the years before the bubble burst in
2001, the stock prices of many technology companies reached levels that were no
longer connected to fundamentals. Even more puzzling was the fact that many
investors who bought these stocks probably knew they were overpriced. Markus
showed in a paper co-authored with Stefan Nagel that US hedge funds - which are
generally considered to be well-informed - invested heavily in technology stocks. At the
time, economists struggled to explain how such price bubbles could form and why even
sophisticated investors participate. Together with Dilip Abreu, Markus developed a
model to explain this phenomenon. The key insight is that even if many investors
individually know there is a bubble, no one knows for sure how many others know about
this bubble and when they will sell the stock. It can therefore be perfectly rational for
informed investors to ride the bubble while it lasts, and then try to sell their stock before
others do.
The macroeconomic effects of the dot-com bubble were limited compared with those of
the global financial crisis of 2007/08. Economists were faced with a difficult question:
How could losses in a particular segment of the US mortgage market trigger the largest
global economic crisis since the Great Depression? The standard macroeconomic
models of the time were not suitable for answering this question, since they largely
abstracted from the role of the financial sector.
Here too, Markus took on the challenge of bridging the gap between theory and reality.
Together with Yuliy Sannikov, he developed a macroeconomic model with a financial
sector that has since become standard in the literature. In their model, the resilience of
the financial system is severely impaired when it operates with little equity. In such
cases, even modest losses force financial intermediaries to cut back on their lending.
The reduction in lending amplifies the negative effect on asset prices, causing
intermediaries to reduce lending still further, and so on. Because of such negative
feedback loops, relatively small shocks can have large effects on the financial sector
and the real economy.
In recent years, Markus has increasingly devoted his attention to new forms of digital
currency. This is another area where economic theory lags behind real-world
developments. In his work with Joseph Abadi and Jonathan Payne, Markus studies
competition between different cryptocurrencies and analyses how regulators should
react when technology companies issue their own digital currencies. In an article jointly
written with Harold James and Jean-Pierre Landau, Markus describes a future in which
privately issued digital currencies are used to settle transactions worldwide. Against this
backdrop, the three authors emphasise the importance of maintaining the official
currency as the dominant unit of account. They posit that, in order to achieve this,
central banks may have to issue their own digital currency. Another paper, which
Markus co-authored with Dirk Niepelt, examines precisely how the introduction of
central bank digital currencies, or CBDCs, might impact the real economy. They
conclude that negative effects could be averted as long as banks can replace lost
deposits with funding from the central bank. The pros and cons of CBDCs need to be
considered carefully, and so far no consensus has formed among central banks.
Markus' contribution to this important debate is therefore most welcome.
While much of his research revolves around financial markets, Markus is an economist
with a broad intellectual horizon. His book The Resilient Society, which was published
in 2021, exemplifies this. Inspired by the coronavirus pandemic, the book analyses how
societies can cope with crises. Markus highlights that a society's ability to bounce back
after shocks depends on many factors. Social norms play a key role in driving people to
cooperate in an emergency. Free markets ensure fast and innovative solutions to new
problems. Economic policy also has an important role to play, for example by
supporting otherwise healthy businesses in a crisis. In today's lecture, Markus will focus
on what central banks can contribute to societal resilience. I look forward to hearing
more about this important and timely subject.
Ladies and gentlemen, please join me in welcoming Markus Brunnermeier with a big
round of applause.