Dr. James Kahn of Yeshiva University’s Department of Economics On The Future of Money and Banking
An Interview With Jason Hartman
Staying true to myself: Over time circumstances at a job will change. The employer’s mission can shift, a new boss may not appreciate you as much as the previous one did, or you may be expected to reorient your work in a way that is not as good a fit for your skills or interests. This has happened to me more than once. The first time I waited too long to change jobs as the situation deteriorated, but the next time I left preemptively and got a position where I was wanted and valued.
The way we bank has changed dramatically over the last decade. It was not too long ago when you had to wait in line in a bank to deposit money. Today things are totally different. You can do your banking without ever walking into a bank. In addition, the whole concept of money has changed. In the recent past, money usually meant bills and coins. But today, the concept of money has expanded to include digital currency and NFTs. What other innovations should we expect to see in banking in the short and medium term?
To address this, we are talking to leaders in the banking, finance, and fintech worlds, to discuss the future of banking and money over the next few years. As a part of this series, I had the pleasure of interviewing Dr. James Kahn
James Kahn is a Professor of Economics at Yeshiva University and chair of the Economics Department. He previously spent over 10 years at the Federal Reserve Bank of New York, where he was a Vice President, conducting economic research and advising senior bank management on monetary policy and macroeconomic developments in the US and world economy. Dr. Kahn’s research has focused on inventory investment dynamics, the sources of business cycle fluctuations, productivity growth, the housing sector, financial markets, banking, and econometrics. He has been the recipient of two National Science Foundation research grants, was a National Fellow at Stanford’s Hoover Institution, and has taught at the University of Rochester, Columbia, Yale and New York University. Dr. Kahn received his PhD in economics at M.I.T. and his B.A. in economics from Harvard.
Thank you so much for joining us in this interview series! Before we dive in, our readers would love to “get to know you” a bit better. Can you tell us a bit about your ‘backstory’ and how you got started in this industry?
My first foray into the subject was an economic history paper that I wrote in graduate school on the so-called Free Banking Era in the US, which was the period between the demise of the Bank of the United States in 1836 and the Civil War. This was a period of relatively unregulated banking that, depending on the state, witnessed many failures, some outright fraud, along with a few successes. I also absorbed at that time the academic literature on bank panics and sources of fragility in banking.
Can you share the most interesting story that happened to you since you began your career?
I have been privileged to meet and work with many interesting and influential people, going back to my college years and early professional career. In college I was a research assistant for Larry Summers, to whom I was connected by my roommate who knew Larry from debate circles. He was an important influence on me to pursue research in economics and an academic career. My work for him, which involved studying the impact of firms’ accounting practices interacted with the tax system to influence their stock market returns, was one inspiration for my undergraduate thesis that examined how gasoline prices influenced used car values (which I modeled as asset prices) based on their fuel efficiency. That work was my first full-length publication in a top economics journal.
Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?
A couple of related quotes come to mind:
Donald Kingsbury: “Tradition is a set of solutions for which we have forgotten the problems. Throw away the solution and you get the problem back.”
G.K. Chesterton: “Do not remove a fence until you know why it was put up in the first place.” (This is really a paraphrase of a longer quotation.)
These quotes are a caution against tampering with existing norms, regulations, and institutions without a deep understanding of how and why they evolved. Many practices may seem odd or obsolete, but may have survived for good reasons, even if those reasons aren’t obvious. This has obvious implications for both innovation and regulation in the financial system.
Ok, wonderful. Let’s now shift to the main focus of our interview. Can you tell our readers about the most interesting projects you are working on now?
I am completing a project on mortgage insurance before and after the 2008 financial crisis. The study finds evidence that prior to 2008, insurance premiums largely ignored many indicators of credit risk, with the consequence that the mortgage lending market was distorted in the direction of higher-risk loans that and ultimately elevated rates of default and foreclosure.
How do you think this might change the world?
It’s an example of how the proper pricing of risk matters, and of the dangers of “socializing” risk. Recently the Federal Housing Finance Authority made changes to mortgage fees, reducing them for the highest-risk borrowers, that ignore this lesson. I would like to think that this research would be influential in arguing against those changes.
What most excites you about the banking or payments industry as it is today? Can you explain what you mean?
All of the innovations in electronic payments make monetary transactions so much easier and faster than they used to be even ten or twenty years ago.
What most concerns you about the banking or payments industry as it is today? What would you suggest needs to be done to address that?
Those same innovations raise grave concerns about privacy and security. Regarding security, banks generally protect consumers if there is fraud involving check and credit card transactions, but not transactions via systems like Zelle and Venmo. And there are grave threats to privacy that arise with electronic payments, given the ability of both governments and financial institutions to track these payments.
How would you articulate how the concept of money has changed in recent times? Is it really a change? How is it still the same? Can you explain what you mean?
The concept of “checkable deposits,” which a few decades ago just meant checking accounts, has broadened to include money market funds and other interest-bearing accounts that have become more liquid with the growth of electronic payment and transfer systems. With the growth of electronic payments systems. Cash and checks have become less important, but otherwise most monetary transactions ultimately still involve these more broadly defined checkable deposits. So the changes are more related to convenience and speed than anything more fundamental.
Based on your vantage point as an insider in the finance industry, what innovations should we expect to see in banking in the short and medium term?
I see continued tension between convenience on the one hand, and privacy and security on the other. In the short term I suspect convenience will win out, but in the medium term the challenges of privacy and security will become apparent and will require either regulatory or technological solutions. A second factor is inflation. The last bout of inflation in the 1970s spurred many innovations in banking and finance (the advent of money market funds, for example), and we are likely to see a repeat of that, as consumers and business will need to protect themselves from the impact of inflation.
How has the pandemic changed the way banks interact and engage with their customers?
It has accelerated the trend toward remote interaction that had already begun prior to the pandemic, again with the help of payment system innovations, apps, electronic transfer systems.
In your particular experience, how has the pandemic changed the way you interact with, and engage your customers/students?
The immediate impact was of course adverse, as remote teaching was simply not as effective as in-person instruction. But there was a more positive long-lasting effect, which was to make it easier to meet with both students and colleagues via online meetings, since it is no longer necessary to coordinate both times and locations.
I’m very interested in the importance of user experience. How much of your interactions have moved to digital such as chatbots, encrypted messaging apps, phone, or video calls? How has this shift impacted the user and customer/student experience? What challenges do these apps present when used as a customer/student engagement tool?
With the exception of online meetings as mentioned above, I have tried to be in-person as much as possible. Communications technology creates more problems than it solves. In online classes students are more easily distracted, and there is greater risk of cheating. Many students now have the expectation of being able to obtain recordings or online access to in-person classes, which if not resisted results in poorer attendance. The main benefits of these technologies for teaching haven’t changed since before the pandemic: The ability to communicate with students outside of class, to provide course materials online, and for students to submit materials online.
If you could design the perfect communication feature or system to help your business/your job as a professor, what would it be?
There are two technologies that might be helpful for the student experience that I have not taken much advantage of. One is for in-class responses to practice questions that would get transmitted to me as the instructor. This could also be used for students who want to ask questions (similarly to the ‘chat’ feature on Zoom), especially if they prefer to be anonymous. The second is online practice questions for students. These are widely available, but I have hesitated to require them because of the expense involved.
Fantastic. Here is the main question of our interview. What are your “5 Things You Need To Create A Highly Successful Career In The Modern Finance, Banking and Fintech industries? (Please share a story or example for each.)
Self-confidence: For example, in a job search, believe that you are the person the employer should be looking for, and sell yourself accordingly. In one job search my first reaction to a listing was that they were looking for someone more senior. But I applied anyway, and it turned out I was exactly what they wanted, and I got the job offer and accepted it.
Staying true to myself: Over time circumstances at a job will change. The employer’s mission can shift, a new boss may not appreciate you as much as the previous one did, or you may be expected to reorient your work in a way that is not as good a fit for your skills or interests. This has happened to me more than once. The first time I waited too long to change jobs as the situation deteriorated, but the next time I left preemptively and got a position where I was wanted and valued.
Be willing to change and invest in new skills: Notwithstanding the previous point, over time your field will evolve, and it is important to keep current and invest in skills and knowledge that keep you marketable and current. The 2008 financial crisis revolutionized economic policymaking and our understanding of how financial markets work. I developed greater expertise in housing and mortgage finance, as well as in banking and bank regulation to stay more in sync with what was valued.
Marketing myself aggressively: I maintain connections to contacts at current and past jobs, and schools. I attend conferences and meetings and make more contacts. One conference I attended resulted in a years-long successful collaboration with another economist.
Perseverance and resilience: Inevitably one will experience failure or disappointment. I have had research I believed in rejected by academic journals. My response is usually to revise the work as needed and submit it elsewhere, knowing that there is always some randomness in the outcome, but believing in the quality of my work. However, my first major publication came after a rejection on what I could see was a misunderstanding on the part of the editor. I responded with an explanation of why the rejection was unfounded. The editor agreed with me and accepted the paper.
You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. :-)
I am of course passionate about economics and would like to persuade more students to become “economically literate.” Economics is a framework for understanding how the world works. Too many students either never quite master that way of thinking and analyzing, despite my efforts, or only see economics as an offshoot to their business or finance career aspirations.
How can our readers further follow your work online?
I have a website, not as up-to-date as it should be, where I try to make my writing available.
Thank you so much for the time you spent doing this interview. This was very inspirational, and we wish you continued success.
