Podcast: Curiosity Unbounded, Episode 17 — From boom to bust, the workings of financial crises

Sally Kornbluth: Hello. I'm Sally Kornbluth, president of MIT, and I'm thrilled to welcome you to my podcast, Curiosity Unbounded. Here at MIT, our endless curiosity fuels a steady stream of inspiring discoveries and innovations. This podcast is your chance to join me as I talk with pioneers who are pushing the frontiers of knowledge and inventing real world solutions for a better future.

Today, my guest is Emil Verner. Emil Verner is the Jerome and Dorothy Lemelson Professor of Management and Financial Economics at the MIT Sloan School of Management, where he explores how finance and the broader economy shape one another. His research focuses on the roots and repercussions of financial crises, from why bank runs and insolvency occur to how debt booms amplify economic swings. He also examines whether debt relief works in times of crisis and how financial turmoil can drive political polarization, and support for populist movements. In addition to being a tenured member of the MIT faculty, he is a faculty research fellow at the National Bureau of Economic Research.

So, welcome to the show.

Emil Verner: Thanks so much, Sally. It's great to be with you.

Sally Kornbluth: Excellent. So funny, when we talk about financial crises at this time of year, I always think of the movie, It's a Wonderful Life, and the attempt to stop the run on the bank.

Emil Verner: Exactly. Yeah, that's a classic example of a pre-deposit insurance bank run, and a great Christmas, uh, movie.

Sally Kornbluth: Exactly. So, what first drew you to studying the financial crises?

Emil Verner: So, I, I kind of got drawn into economics. I think it was Napoleon who said that to understand someone, you have to know what was happening in the world when they were 20. When I graduated high school was 2008, so it was the start of the 2008 financial crisis, which was a really, I mean, major event, I think as most people will remember, you know, the US housing market was crashing, then later there was troubles in all kinds of financial markets no one had ever heard of. Then, you know, the broader stock market started collapsing, and very serious people seemed to be very concerned, and there was lots of interventions.

And as sort of a 17, 18-year-old, I just felt like it was complex, it was interesting, and I didn't understand it at all. And I felt like when I asked people who maybe should understand what was going on, they gave me answers that were not fully sort of sufficient . . .

Sally Kornbluth: Yes. Yes.

Emil Verner: . . . or didn't sort of fully understand the system. And I'd always liked math and history, and then I kind of realized well economics was a way to combine that. There was both, you know, mathematical modeling, but also empirical research using historical data, and financial crises, because of that period, but also my interest in history became a natural thing to study because they're not so common, they're relatively rare events, even though they, they can kind of be major wa- watershed events-

Sally Kornbluth: And reverberations.

Emil Verner: And reverberate. But they're relatively rare. And so history becomes a valuable tool as well, in addition to kind of the standard, uh, tools that we have in economics. So then I, I went into undergraduate at the University of Copenhagen, and I studied economics, math, and then kind of got the research bug and went to Princeton, did my PhD, which was a great place to work on exactly these topics. And people were still grappling with understanding sort of the root causes of the 2008 crisis, how it related to past crises, and then kind of thinking about policy responses, how do we prevent this type of thing from happening again? Can we prevent it from happening again? And so then it took on from there. And basically for the past 18 years, I've been fascinated with this topic.

Sally Kornbluth: So I'm actually curious, you know, it's funny that my experiences in 2008 was actually my first exercise in institutional budget cutting because I was a vice dean in a medical school, and this obviously caused huge cuts across the university. And sadly, we're thinking about cuts now. But back to your moment in 2008, in a nutshell, can you tell the audience, like, what caused that particular crisis?

Emil Verner: I think at a very high level, what you see for that particular crisis, and actually for many crises in general, is to really understand the crisis, you have to understand the three to five years preceding it, which was this massive expansion in lending credit to borrowers, in this particular case, to mortgage borrowers in the US, but also in other countries, a similar pattern, whether that's, you know, Ireland or Spain, just lots of lending based on what turned out to be the flawed view that people would be able to repay these loans either because the value of their houses would continue to appreciate or, you know, they would have enough income to be able to pay the loans or potentially refinance the loans.

So at a high level, yeah, this very, very rapid expansion in debt in the economy that ultimately was not sustainable. And then once sort of the reckoning came, people realized, oh, actually these loans are not quite as solid as we had expected. And so that meant from two perspectives on the borrower side, people who had taken these loans all of a sudden had a lot more debt than they could service. And so the direct effect is, well, you have a lot more debt, you know, relative to your wealth than you sort of expected, then maybe at the same time you lose your job or something with all this debt-

Sally Kornbluth: So consuming stops.

Emil Verner: You, you stop consuming.

Sally Kornbluth: Yes.

Emil Verner: You stop spending and that just has a very direct kind of simple effect because if I stop consuming, well, then my consumption is my spending is your income. And so then your income is gonna go down. And so then you're gonna stop consuming. And so that kind of has its own amplification or what we call multiplier effect. That's on the consumer side.

And then at the same time though, there were lots of people who had bought, owned these loans, invested in these loans around the world, but there were especially concentrated positions in US financial institutions, so major banks, investment banks, and they had loans that, you know, they thought were AAA rated that weren't gonna default. And then all of a sudden the value of those loans and also the bundles, the portfolios of those loans in what were called securitizations and so much jargon at the time, they were also falling in value and these financial institutions were very, very highly levered themselves, which meant they had these assets that were falling in value and they had a lot of debt as well.

Sally Kornbluth: Right. So it's a cascading effect.

Emil Verner: And it was a cascading effect-

Sally Kornbluth: Yeah.

Emil Verner: And then the financial system became impaired.

Sally Kornbluth: Yes.

Emil Verner: And then when the financial system becomes impaired, then that's also bad for the economy because the financial system is sort of like a utility. It's sort of like, it's basically just like you need utility to electricity to run a building. Lots of businesses need credit to meet payroll, to pay for working capital. And when that credit becomes tighter, just like not having light makes it harder to do a podcast, if you don't have a credit to finance, then you're gonna be laying off people and you're gonna ... And so all of those things sort of fed on each other, amplified each other, and generated the worst economic downturn since the 1930s in the US.

Sally Kornbluth: It's interesting how policy missteps can snowball and create crises. I mean, we're seeing that in a number of ways now. So what's actually at stake in the longer term? For instance, how did the economy recover after that and how do we think about recovery after a crisis?

Emil Verner: If you look at the long run historical data, say you look at advanced economies, say 18, 20 advanced economies over the past 115 years, kind of since the time of industrialization, and you define financial crises as times when there's kind of severe impairment in the banking system, then you can actually look at and estimate what is the economic cost of those crises. And what you see is two things. So one, real GDP, so real income in the economy tends to fall by about three to 5% on average, and that's actually kind of similar to the downturn in the 2008, uh, Great Recession for the US. Some episodes are much more severe like Greece, very bad financial crisis. Some will be milder, but around 4% of GDP is sort of a, a typical number that you find.

But then the second fact is that GDP often takes a very long time to recover back to its trend. In fact, often it looks like it basically doesn't recover to trend. It's sort of like a step function down, and we're just a little bit, well, those 4%, so actually quite a lot poorer than we would have been sort of absent the crisis. So that's just kind of like in pure dollar terms, you can start to add it up and these crises basically are very expensive.

Sally Kornbluth: Right. You know, not to get too political, but I think what's happening now is because of policy, we are really having to retranche in terms of our budget. And what that means obviously is we have to work harder to find resources for the research enterprise. And why that's really important in terms of what you think about in terms of our financial health is that if you look over the long term, places like MIT have a huge impact on the US economy. So we've started over the many years, tens of thousands of companies creating millions of jobs, and the impact of places like MIT on the country are equivalent to the impact of other countries that are the 14th largest GDP in the world. In other words, we are having reverberating effects. It's not just MIT, it's peer institutions like us. So I worry that the long-term impact of really cutting what goes on at universities is gonna stifle innovation and just have long-term economic consequences.

Emil Verner: I completely agree with that. I mean, in the long run, we know what drives growth is innovation-

Sally Kornbluth: Exactly.

Emil Verner: ... and new ideas, and we know that the foundation and the basic research for that type of innovation comes from places like MIT, and MIT has been a driver of that. And we have actually current research in economics that shows that, you know, cutting that type of government spending for basic research has major costs down the road in terms of less innovation, less productivity, and ultimately just lower living standard for everyone.

Sally Kornbluth: Your comment on Greece though also makes me think that in a global economy now, presumably, we can be impacted severely by financial crises in other countries because of the sort of just global impact that we see now. Is that, is that the case?

Emil Verner: Absolutely. I mean, I think that there's kind of two mechanisms. One is financial flows between countries have become much bigger. So in the 2000s, actually what was happening was there were major, what, what were called capital inflows, so lending by foreigners into the US, and that actually sustained a lot of this lending boom, and the same was happening in, in Greece. And then also through trade linkages. So if one country has a downturn, they stop demanding products from other countries, and that sort of has international spillover effects. It still seems to be the case that the US plays a very kind of central role. There's kind of this old saying that if the US sneezes, the world catches a cold, and the US cycle in terms of financial conditions kind of sets the tone for the world cycle, yeah.

Sally Kornbluth: Yes. No, it's interesting. Do you think that the same mistakes are repeated? If you look at financial crisis you've studied historically, are they different mistakes or are people just stumbling into the same things over and over again?

Emil Verner: I think it's the same mistakes, but with sufficiently new details that people kind of miss the bigger picture. I mean, basically, financial crises are, tend to be preceded by very rapid expansions in debt or leverage, along with very high kind of market valuations of particular assets. So often real estate type assets are land, sometimes, you know, the stock market. I think the mistake that people tend to make is that they tend to think that this time things will work out fine, that the high growth in leverage and the booming stock market and booming housing market, that's because of some very, very strong fundamentals, and it's gonna be different than the other types. I think that's kind of the core mistake that's made, but then in each crisis it's often-

Sally Kornbluth: The variations on a theme.

Emil Verner: Variation on a theme.

Sally Kornbluth: Yeah.

Emil Verner: That's exactly it.

Sally Kornbluth: Yeah, that's interesting. Do bank runs still happen even in a world of digital banking and FinTech and crypto? Is that still a thing?

Emil Verner: Absolutely, yes. So, I mean, I think they come in new guises. So for commercial banking are commercial banks, you might have a checking and a savings account that's at Wells Fargo or, or Bank of America, consumers are protected up to the deposit insurance limit of 250,000. But what we've seen even in the commercial banking sector is bank runs happen on banks for people, especially small businesses or, who have, uh, deposits above that limit. So we saw that in March of 2023 with the runs on Silicon Valley Bank and First Republic and Signature Bank.

Sally Kornbluth: Right.

Emil Verner: These were, for the case of Silicon Valley Bank, these were startups in, you know, the Silicon Valley area that had big deposits in Silicon Valley Bank they were using for payroll. They weren't paying too much attention to the condition of Silicon Valley Bank until all of a sudden rumors sort of started spreading, actually, this bank is really not particularly well managed.

Sally Kornbluth: I see. Yes.

Emil Verner: Very big losses on some of their asset holdings. Maybe it's better to just get out.

Sally Kornbluth: Get out. Yeah.

Emil Verner: And that, that sort of started to spiral just like in It's a Wonderful Life.

Sally Kornbluth: Yes.

Emil Verner: If I see that you run, I think, well, maybe I should run too and it's even better if I can run a little bit faster than you. And so everyone tries to run and get ahead of the queue. And for banks that are strong, this can sometimes happen and usually they can manage this because other banks might lend to them or they can borrow from the Fed. But for banks that are weak or insolvent-

Sally Kornbluth: Right.

Emil Verner: . . . that can be kind of the trigger, that can be the death blow for these banks. And that's what we saw for Silicon Valley Bank. And now you mentioned sort of digital assets.

Sally Kornbluth: Yes.

Emil Verner: I think there, you're seeing a lot of the same potential risks as we had in this sort of unregulated financial system of 80, 90 years ago. So we have stablecoins, for example, that are these crypto assets that are backed by some kind of debt, either corporate bonds or treasuries, and if people start to worry about, for example, what's backing, say, the Tether stablecoin, then people could run on that as well. And you could have something that looks like a traditional bank run.

Sally Kornbluth: I think for, like, the average person, the notion that these coins are backed by something is completely mysterious. We don't think of, like, bars of gold sitting in Fort Knox.

Emil Verner: Exactly. Yeah.

Sally Kornbluth: Some hard to describe nether-world that these are operating.

Emil Verner: And I think some of them, as we saw, for example, there was this run on this crypto asset called Terra Luna a couple years ago. One of my colleagues, Antoinette Schoar, worked on that particular case.

Sally Kornbluth: I see.

Emil Verner: And I think really there was nothing really backing it.

Sally Kornbluth: Oh, interesting.

Emil Verner: So there's been some regulation to basically try to regulate what these types of stable coins should actually be holding, but nevertheless, I think there's still a lot of opacity in that system and the scope for, I think, major runs. And it's become very big, you know? It's, uh, it's become a very big market.

Sally Kornbluth: So the notion that we can't coin our own money might not be true. Yeah, that's a little scary.

Emil Verner: Yeah.

Sally Kornbluth: So when there are trouble at these major financial institutions, banks, et cetera, how does it affect everyday Americans? I mean, you talked about Silicon Valley Bank, but that was largely startups, very large holders, as you mentioned. But what happens to everyday Americans? I guess the 250K limit is helpful in terms of insurance, but . . .

Emil Verner: Yeah. When the financial system becomes impaired, before deposit insurance, you would have runs on banks, especially banks that were suspected of being insolvent or unhealthy. And so we introduced deposit insurance, Federal Deposit Insurance in the Great Depression. So in 1934, and that protects people's basic savings against losses from bank failures. So for ordinary people in terms of their basic savings, that's okay. But at the same time, you know, banks do lots of other things than just provide deposits. So people rely on banks for their auto financing, for mortgage financing, lots of other, you know-

Sally Kornbluth: And is that total in aggregate all the holdings across a given bank? So if I have five different kinds of accounts or five different kinds of financial interactions with a given bank, is the 250K limit for what you have deposited in an individual account?

Emil Verner: Oh, for deposit?

Sally Kornbluth: Yes.

Emil Verner: Yes. That's actually a good question. I don't know the exact answer.

Sally Kornbluth: Yeah. Like, because I've always wondered if we should be diversifying our deposits across, you know, five different banks.

Emil Verner: You can do that, yes.

Sally Kornbluth: Yes.

Emil Verner: And there are actually services that will do that.

Sally Kornbluth: Interesting.

Emil Verner: So these sweep accounts that will diversify your deposits across different banks. So there's some scope for doing that, but I think what I found in my research, I wrote a paper called Banking Crises Without Panics. And panics are basically these times when people run on banks. And the point is basically to say that that's one manifestation of crises, but I think that the deeper root of crises is often not the runs, those are more the symptoms and kind of the immediate triggers. The deeper roots is that you have banks like what I described for the 2008 crisis that are severely impaired. The quality of their assets is very low. They have a lot of debt, which means that they're basically what we call in economics under capitalized. So they have very, very low capital.

And when they have very, very low capital, they can't do new things. They can't go out and make new loans. They can't go out and, you know, give an auto loan or, or give a working capital loan. And so this sort of ... We call that the, the credit channel or the lending channel, that particular channel of intermediating funds.

Sally Kornbluth: But it's a spiral, right?

Emil Verner: Yes.

Sally Kornbluth: So if they can't lend, they have no source of income.

Emil Verner: Yes.

Sally Kornbluth: And then they can't lend and that ... Yeah.

Emil Verner: It becomes more difficult for them to get out of the, of these crises. Yeah.

Sally Kornbluth: Yeah. Interesting.

Emil Verner: And so often what successful policy has done is effectively do some sort of recapitalization of banks. So basically provide, put in new equity into the banks that sort of supports new additional lending.

Sally Kornbluth: Got it. Got it.

Emil Verner: Even though that's often politically very hard and unpalatable, but I think to kind of get the economy going again, successful interventions have required that type of recapitalization.

Sally Kornbluth: Got it. And so going back to the crises then, from what I understand what you said, you see sort of a boom in debt preceding it.

Emil Verner: Yes.

Sally Kornbluth: And once you reach that point, there's no going back, I assume.

Emil Verner: That's right. Yeah. There's no going back because debt is a contract where if I make you a loan and we agree on some amount of the loan and some interest, then basically for you, it's not like an equity contract where we can share some of the risk.

Sally Kornbluth: Right.

Emil Verner: You actually then are on the hook for making the promise, payment that you've promised me, otherwise you'll have to go into bankruptcy or default, and that has its own costs. And that's exactly right. And we've seen that from the run up to the Great Depression, to the 2008 crisis, to the major crisis in Japan in the early 1990s, to the crises in emerging markets. They very often have this flavor of rapid capital inflows, rapid lending, lots of debt, and just more debt than actually the system can handle, and then therefore that leads to people cutting their spending a lot and to people defaulting and then having these spiral effects on the economy.

Sally Kornbluth: Yeah. And this sort of financial turmoil, if I understand it, your work has shown that it actually fuels political polarization and populist movements. And so why does this happen? Why does this often spill over into politics?

Emil Verner: I think the Financial Times had this headline in 2018 where they said, you know, 10 years after the 2008 crisis, the lasting legacy of the crisis was populism and big political shifts. And, you know, there had already been some trends, but I think the 2008 crisis was sort of a major watershed moment where politics in many countries changed substantially. And what we've argued, you know, I think there's a range of different factors. What we've argued in some of my research is that a crisis effectively involves a decision about how to deal with the cost of the crisis. So there's too much debt, the debt can't be repaid. So there's a question of, well, how do we distribute the burden of paying for the crisis?

Sally Kornbluth: Right.

Emil Verner: And that has created an opportunity in many countries for economic populists to come in and say, "Look, these debt contracts, we should just abrogate them."

Sally Kornbluth: I see.

Emil Verner: The bankers, the lenders, who are often the-

Sally Kornbluth: So they, they should absorb it.

Emil Verner: Yeah, exactly. And the capitalists, the lenders, the elites, right? They don't have the interest of good ordinary debtors at heart, so we should go in and, and intervene and provide debt relief, punish the banks, don't bail out the banks, and there's a lot of demand for that type of policy. And you saw that in many countries after 2008, you saw that in the 19th century with Williams Jennings Bryan, who was advocating on behalf of farmers that had too much debt and wanted basically the, their debt burdens to be alleviated. So I think that's sort of one classic tension that you have in crises is who pays for the crisis, how do you distribute the burden of adjustment?

Then I think there's some other channels. I mean, often crises, if they happen on the watch of more establishment politicians, effectively ends up at worse discrediting those types of parties and it becomes very difficult for those parties to recover and it creates openings for new sort of political entrepreneurs to come in and say, "Let's do things completely differently." And some of those old principles, like, or values like we should respect contracts.

Sally Kornbluth: Yes, yes, yes.

Emil Verner: And if you sign a contract, well, let's, you know, that's not so important as, you know, ma- making sure that we, for example, protect the interests of ordinary people. And so I think that helps understand that's what we found in some of our work.

Sally Kornbluth: Also, I guess when people are feeling financial pain, they're looking for some kind of political answer.

Emil Verner: That's right. Yes.

Sally Kornbluth: And, or a scapegoat-

Emil Verner: Yes.

Sally Kornbluth: . . . or, you know-

Emil Verner: They're looking for something new-

Sally Kornbluth: . . . or a bailout. (laughs)

Emil Verner: They're looking for something new, they're looking for a bailout, they're looking for some sort of solution, and the party that's in place, you know, often gets the blame. And then sometimes you might just see a swing toward another establishment party, but what we see after financial crises is something more extreme, often because these are extreme events, and it leads to sort of these more extreme shifts, and also some darker sides. Lots of crises have led to a rise of kind of xenophobic or anti-

Sally Kornbluth: Yeah, or political violence, or-

Emil Verner: Political violence.

Sally Kornbluth: It's interesting, because like so many political judgments, there's such a lag time before the actual event. So as you're saying, people tend to blame the current administration, but who knows when that sort of ball got rolling?

Emil Verner: That's exactly right. Yeah. That's exactly right. And I think the one other thing that's interesting is people tend to blame the incumbent party for crises, but the very challenging thing for policymakers and for politicians is that no one will ever give you the credit for preventing a crisis that didn't happen.

Sally Kornbluth: That's right, that's right. 'Cause you'll never know.

Emil Verner: 'Cause you can never really prove that negative.

Sally Kornbluth: Exactly. Exactly.

Emil Verner: And so that means, you know, if you're in, let's take the US, for example, in 2006, 2007, say you're the Republican administration, are you gonna sort of try to tell banks, let's ease off on the lending a little bit. Let's take away the punch bowl. Let's slow everything down because things are looking a little bit frothy and a little bit risky. Well, if you do that, maybe you, you know, you might-

Sally Kornbluth: You might advert it, but then you will have slowed the economy and people will blame you anyway.

Emil Verner: Perhaps, exactly. Yeah.

Sally Kornbluth: Yeah.

Emil Verner: And that I think is one of the reasons why crises will always come back to us. As much as we can try to mitigate their costs, the fact is that not even the most advanced economies have been able to sort of graduate or not have crises anymore. We don't have them for our time, but then they come back. And I think it's because of that challenge of you don't get the credit for preventing crises fully. And so then therefore at some point mistakes will happen, people will become too optimistic, we will get these dynamics.

Sally Kornbluth: It's interesting. That's interesting. So looking at today's global economy, in this country, we're seeing real estate impact, et cetera, but where do you see vulnerabilities that echo past crises now? And what about the AI bubble?

Emil Verner: So in terms of vulnerabilities, I think, yeah, if you look at the US stock market is priced very highly. So if you look at sort of valuation ratios like the price relative to our earnings ratio, there's a, a few different ways that people like to construct these measures. The stock market looks quite expensive and it's had a great run.

Sally Kornbluth: This is scary for those of us who are, you know, on in years and looking at returns on our savings.

Emil Verner: Certainly. Well, it's been exciting, I guess. And then the question is, you know, do you-

Sally Kornbluth: What's gonna happen now?

Emil Verner: Do you then maybe take some of those gains and rebalance your portfolio away from stocks?

Sally Kornbluth: Yes.

Emil Verner: And I think the traditional answer from financial economics would be, yes, I think you do wanna do a little bit of that rebalancing. At the same time, it's very, very hard to call a bubble-

Sally Kornbluth: Oh, that's right. 'Cause you don' wanna, you don' wanna give up gains.

Emil Verner: Yeah, exactly. So-

Sally Kornbluth: Yeah.

Emil Verner: . . . I think it was, you know, Alan Greenspan, for example, during the dotcom bubble, which I think is maybe the best analogy to what's happening now, even though it's not perfect. He had his famous irrational exuberance speech, I think it was in 1996, and the bubble went on for another three years, and then when it, you know, when the market crashed, it roughly crashed back to where it was during Alan Greenspan's speech, maybe a little bit higher. So that shows you sort of the difficulty of that.

Sally Kornbluth: And what happens to bonds in these situations? 'Cause that's usually the rebalance.

Emil Verner: Exactly. Traditionally, so in these types of crashes, the Fed has cut interest rates and bonds have done relatively well. And so bonds have served as sort of a good hedge-

Sally Kornbluth: Yes.

Emil Verner: . . . against stocks.

Sally Kornbluth: Yes.

Emil Verner: The one thing that you see that's a little bit more concerning is that correlation in the past few years has seemed to flip.

Sally Kornbluth: I see.

Emil Verner: So bonds have become more positively correlated with stocks, and so not even bonds have become a good hedge. But I would say if you have something like a ... Say the current stock market boom looks like it's a bubble. It crashes. That will be a drag on the economy. The Fed will cut rates.

Sally Kornbluth: Yes.

Emil Verner: I think bond yields will go down and prices will go up for bonds, and that means that bonds will, uh, be-

Sally Kornbluth: Will be a reasonable hedge.

Emil Verner: . . . be, a useful hedge in stocks.

Sally Kornbluth: Yeah. Interesting.

Emil Verner: Yeah. So.

Sally Kornbluth: Interesting. So what's one thing that actually has surprised you in your own research, something that you didn't expect to uncover about financial crises?

Emil Verner: So I think the main surprising feature for me has been that just like you started out talking about It's a Wonderful Life, it's a run, there is a narrative when we teach introductory economics that kind of the salient feature of crises and really what sparks them and what kind of what causes them is these runs.

Sally Kornbluth: Yes.

Emil Verner: And I think the range of different work I've done looking at historical episodes, looking at lots of also micro data is I think actually the runs, the best way to think about them is they're the symptom of some much deeper underlying problem. And they might be the trigger that, you know, makes everyone realize, okay, now we really are in trouble, but they're not sort of the root cause. And that actually goes a little bit against sort of this kind of textbook way that we would think about crises and runs as basically being these very unexpected jumps where something goes bad.

Sally Kornbluth: They're reflections of some previous underlying problems.

Emil Verner: That's exactly right. Yeah. And so that balance of viewing them more as that reflection, that's surprised me and sort of was, was not where I, where I came from.

Sally Kornbluth: Interesting. Interesting. So I understand that you have young children. Do you think about the future of the world they'll grow up in? How do you see ... I mean, maybe framed in terms of the financial system as opposed to the whole world-

Emil Verner: Yes.

Sally Kornbluth: . . . because we all worry about that.

Emil Verner: I mean, yeah, my kids are six months and four years, so-

Sally Kornbluth: Oh wow. Okay.

Emil Verner: It's gonna be hard to predict what the labor market, what the world is gonna look like right now in the future. I do worry about the rise of government debt. So in terms of other vulnerabilities, we've been kind of in this phase where we've paid for lots of crises by spending lots of money that we haven't raised taxes to cover, so we've raised debt. And in lots of countries, whether it's my own country of origin, Denmark or the US, we've made lots of promises to people, you know, about their retirements through Social Security and similar programs, and people are just having fewer kids, and that means that those promises-

Sally Kornbluth: The support of the base is problematic.

Emil Verner: The . . . Exactly.

Sally Kornbluth: Yeah.

Emil Verner: Are, are gonna be borne by smaller and smaller generations as things are going. And, you know, right now, I mean, fertility rates are really collapsing.

Sally Kornbluth: Yes.

Emil Verner: And so what you're seeing is, you know, I saw a projection that if you just look at, say, US current policy, tax and transfer, retirement policy, and you project that out about 50 years, then the US is gonna have a deficit of something like more than 10% of GDP.

Sally Kornbluth: Wow.

Emil Verner: So that's completely unsustainable. And so what that means is that obviously there are gonna have to be these major fiscal reforms, but at the same time, I do worry that we're gonna put a lot on these future generations in terms of paying for the builds of debt in the past.

Sally Kornbluth: And, you know, the political impetus to always cut taxes, et cetera-

Emil Verner: That's right. Yeah.

Sally Kornbluth: . . . is problematic.

Emil Verner: That's right.

Sally Kornbluth: I mean, to some extent, that's how we got where we are, right? Because at some point in time, our national debt was under control.

Emil Verner: That's right. Yes. The US federal government spends about 22% of GDP, but it brings in taxes right now of about 17% of GDP.

Sally Kornbluth: Yeah, that's problematic.

Emil Verner: So, there's a, there's a big gap. And I think the one aspect that makes me a little bit more positive, optimistic about the US is that, you know, 17% of GDP, if you compare that to other countries-

Sally Kornbluth: Oh, of course.

Emil Verner: . . . it's not so high. So we could tax more. There is a lot of wealth in the US.

Sally Kornbluth: Oh, we could certainly tax more, but-

Emil Verner: There are other countries that have a lot of debt, and I think the only way they can really deal with it-

Sally Kornbluth: Yeah.

Emil Verner: . . . is by cutting services, cutting spending.

Sally Kornbluth: That's right. That's right.

Emil Verner: So the US has maybe a little bit more, ah, wiggle room.

Sally Kornbluth: It's political football.

Emil Verner: But it's political. That's ... Yeah.

Sally Kornbluth: Yeah. Yeah. That, that's a problem.

Emil Verner: We are in a country that was founded on the dissatisfaction with taxes. Yeah.

Sally Kornbluth: Yeah, exactly. Well, this has been really illuminating for me. I've always had curiosity about these issues. So I really wanna thank you today for having this conversation. And to our audience, thank you for listening to Curiosity Unbounded. I very much hope you'll join us again. I'm Sally Kornbluth. Stay curious.

Emil Verner: Thanks very much. It was a pleasure.

Curiosity Unbounded is a production of MIT News and the Institute Office of Communications, in partnership with the Office of the President. This episode was researched, written, and produced by Christine Daniloff and Melanie Gonick. Our sound engineer is Dave Lishansky. For show notes, transcripts, and other episodes, please visit news.mit.edu/podcasts/curiosity-unbounded. Please find us on YouTube, Spotify, Apple, or wherever you get your podcasts. To learn about the latest developments and updates from MIT, please visit news.mit.edu. You can follow us on Facebook and Instagram at CuriosityUnboundedPodcast. 

Thank you for joining us today. We hope you’ll tune in next time when Sally will be speaking with Song Han, an associate professor in electrical engineering and computer science at MIT. Song’s research focuses on making generative AI more efficient and sustainable. In this conversation, he explains how the future of AI isn’t just about bigger models or flashier capabilities — it's also about making these systems efficient, accessible and environmentally responsible.