Money matters: An economist on the Fed, the banks and the future

By Catherine Zandonella

IT’S BEEN NINE YEARS since the start of the Great Recession, and economies are still recovering worldwide. Economists are still debating — not about the causes of the crisis, which involved shoddy lending standards and economic opportunism — but about what can be done to prevent future calamities.

Markus Brunnermeier

Markus Brunnermeier is the co-author of The Euro and the Battle of Ideas with Harold James, the Claude and Lore Kelly Professor in European Studies and professor of history and international affairs at Princeton, and Jean-Pierre Landau, a professor at Sciences Po, Paris (Princeton University Press, 2016).

Markus Brunnermeier’s research explores the underlying mechanisms behind the crisis and suggests possible solutions. His insights are part of a new Money and Banking video series he created to explain these concepts to his students and the public.

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The German-born economist has been studying bubbles and their inevitable bursts since coming to Princeton in 1999. Brunnermeier grew up in Bavaria under the expectation that he would take over his family’s carpentry business, but in his early 20s, he pivoted to follow a dream he’d had since 10th grade — to study economics and apply his knowledge to improving how people live.

He does this through his research on how government central banks like the U.S.’s Federal Reserve System (the Fed) can keep the economy healthy. Central banks can inject money into a wobbly economy. But how can they do this in a way that stabilizes the economy without unleashing inflation? Should they rescue banks, or help consumers?

These are questions that Brunnermeier, the Edwards S. Sanford Professor of Economics and director of the Bendheim Center for Finance at Princeton, and an academic consultant to the Federal Reserve Bank of New York, has studied for the past several years with his collaborator, Yuliy Sannikov, a former Princeton professor of economics who is now at Stanford University. They put forth their ideas last year in a working paper titled “The I Theory of Money.”

More about what the “I” stands for in a moment, but first, it helps to have a little background. Many people do not realize the role that banks play in injecting new money into the economy. Although some of the money in the economy comes from the Federal Reserve, money is also created when banks grant loans, including mortgages. These loans do not come from stacks of bills retrieved from a vault — rather, they stem from newly issued electronic money. In fact, banks and other financial institutions have become the largest source of new money in the economy.

These loans can carry some risk, however. When the financial crisis of 2008 hit, some borrowers defaulted, leaving financial institutions with less money to meet their obligations. To compensate, banks sold some of their existing loans to other financial institutions at fire-sale prices. With few buyers for these risky loans, the prices fell even more, driving a “liquidity spiral.”

The banks also granted fewer new loans, creating less new money. Consumers, fearing job losses, started holding more savings. In short, banks lowered their money supply at the same time that consumers expanded their demand for money. To attract buyers, producers lowered the prices of goods, causing deflation.

Deflation is bad for banks because they have to pay depositors in money that has become more valuable than it was when deposited. Deflation is also bad for the economy as the value of the debt rises for indebted homeowners and businesses. As businesses earn fewer profits, they may lay off workers and cut expansion plans. The economy stagnates instead of recovering. Each bank tries to be more prudent by reducing its leverage, but when all banks do this, the overall risk in the economy rises, leading to what Brunnermeier and Sannikov call the “paradox of prudence.”

One key to stopping these negative feedback loops is to restore the banks’ ability to start lending again, Brunnermeier and Sannikov argue. Once banks start lending, they can again create new money, which the researchers call “inside” money. This is the “I” in the I theory of money.

The I theory suggests that when faced with the choice to help floundering banks or flailing consumers, the right choice is to help the financial sector because it is the bottleneck to recovery.

One way that the Fed can help switch off the adverse feedback loops is by cutting interest rates. To see how, imagine that a bank holds long-term loans that are being repaid at a fixed 5 percent interest rate. If the rate goes down, those old loans increase in value because they bring in more money than new loans issued at the lower rate. “This is like a helicopter drop of money to the banks,” Brunnermeier said.

The I theory suggests that the Fed’s decision after the 2008 crisis to lower interest rates, and to shore up banks by buying their troubled assets, both helped individual consumers by keeping home prices from falling and helped stabilize these bottlenecks in the economy.

“Before the financial crisis, people thought that as long as you keep inflation in check, everything will be fine on the financial stability side, too,” Brunnermeier said. “What the crisis has shown is that price stability does not automatically imply financial stability.”

How can this research lead to a safer future? Monetary policy — the toolbox of central banks — as well as an economy-wide prudential policy that limits risky lending, needs to be proactive and take steps before a crisis occurs, Brunnermeier said.

“Economists are like doctors — we can warn about the risks of too much cholesterol but we cannot tell you exactly when the heart attack will strike,” Brunnermeier said. Economists also cannot always force patients to take their medicine or change their lifestyles. And patients can usually find someone willing to give them a different second opinion.

Brunnermeier hopes his research will help central banks make sound policy decisions. They are already picking up on his research. “Economics as a field is about helping policy-makers and the public make better decisions, whether on monetary policy or on how to save for retirement,” he said. “Without it we would be poorer not only financially but also in terms of our well-being.”

View the Money and Banking series online at


Jane Cox on LEDs, lighting design and the role of light in storytelling

By Catherine Zandonella

WHEN PRINCETON’S NEW LEWIS ARTS COMPLEX was under design, Jane Cox was one of the primary advocates for going all-LED in the new theatrical performing spaces.

“It was a risk to go to all LEDs because the technology for entertainment is changing fast, but the decision was for Princeton to be at the forefront of energy efficiency in design,” said Cox, director of the Program in Theater and a senior lecturer in the Lewis Center for the Arts. “We also decided that our basic lighting systems should be automated for maximum flexibility, and are betting on the sophistication of our students to learn to engage with these systems and maximize their potential.”

With the opening of the new complex, Cox will oversee one of the first all-LED theaters in an educational setting. Automated LED lights provide versatility in creating different lighting states and they consume vastly less power than traditional light sources.

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Jane Cox

Jane Cox talks about how lighting can transform story-telling. PHOTO BY DAVID KELLY CROW

The lighting systems also honor the vision of Cox’s predecessor as director of the theater program, Tim Vasen, who died in 2015. “Tim loved to push boundaries and embrace technology,” she said. “I think he would be happy to see what has been accomplished.”

Cox has created lighting designs for theaters from London to Los Angeles and has twice been nominated for a Tony Award for her lighting designs in Broadway productions.

Learning to work with light as a form of creative expression means learning how light functions, how we see it and how we relate to it, Cox said. She was drawn to lighting design while studying music as an undergraduate at the University of London, and she finds many parallels between lighting and music.

“Both lighting and music are about temporal relationships,” Cox said. “Everything is experienced in relationship to what you just heard or just saw. Light is experienced in time, and has a harmony and a melody. Changes in light are experienced physically, and can profoundly alter the relationship between the performers and the audience,” she said.

Light’s color, angle, intensity, movement — each can bring meaning to a character’s lines and arouse emotions in spectators. For example, for a 2016 production of New York Theatre Workshop’s Othello starring Daniel Craig and David Oyelowo, Cox lit the set using only contemporary military lighting gear. “It is hard to put into language the psychological impact of sharing a space lit with emergency lights or by red head-lamps,” she said.

With the new theater lighting, Cox is excited to be able to explore with her students ways that technology can enhance person-to-person interactions. “I’m in theater because I am interested in what happens when we put people in a room together,” she said.

Our response to light infuses the art of visual storytelling, whether it is in a play, a film, a video game or virtual reality, Cox said. “Our relationship to light is so primal. Light is one of the first things we experience in life,” she said, “so it is no surprise that it is integral to how we experience theater.”

John Pardon on math’s power to distract and divert

By Yasemin Saplakoglu

GETTING A TIRED and hungry 12-year-old to hike another mile up a steep mountain is a daunting task. But John Pardon’s parents quickly figured out a simple solution that saved many of their family vacations from stress and despair: distract him with math.

Pardon’s father, William Pardon, a mathematics professor at Duke University, would ask him probing algebra questions as soon as his son’s legs began to ache and his pace slowed down.

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It was a tactic his parents used on many occasions. When he was 5, his parents whispered something in his swim teacher’s ear. Pardon, too scared to tread water, suddenly found his arms and legs moving as he answered his swim teacher’s multiplication questions.

John Pardon

John Pardon, professor of mathematics, finds that mathematics can be calming in stressful situations. PHOTO BY DENISE APPLEWHITE

Pardon, appointed a professor of mathematics in 2016 just five years after he was the valedictorian of Princeton’s undergraduate Class of 2011, grew up in Durham, North Carolina. He spent his childhood solving puzzles, building circuit boards and robots, and eventually writing computer pro-grams as he entered his teenage years.

During high school, Pardon took math classes at Duke and attended a handful of programming competitions, most notably the International Olympiad in Informatics where he won a gold medal three years in a row.

As an undergraduate at Princeton, his successes culminated in solving a problem posed in 1983 by the Russian-French mathematician Mikhail Gromov.

“I knew about this problem for a couple of years before I actually did anything about it,” Pardon said, recalling how he scrolled through various math problems online in preparation for a national science competition as a rising senior in high school.

The summer before he entered Princeton, Pardon continued to think about the problem, which asked whether a specific type of knot without any ends, called a “torus knot,” could be tied without altering its shape.

“The most interesting problems, like this one, are the ones where you have absolutely no idea where to start,” he said. Pardon typically doesn’t start on paper, but spends time working out the problem in his head and imagining possible directions it could take.

A few years later, as a junior who was not only majoring in math but also finding time to play the cello and learn Chinese, he almost figured out a solution. “I thought I solved it for like two weeks,” Pardon said, laughing. “It was complete nonsense.”

When his senior year rolled around, he finally figured out the answer. He realized that if he were to unwind the complex, mind-boggling mathematics, the answer was: no, you could not tie a torus knot without altering its shape.

“He walked into my office, handed me the manuscript of his proof and asked me if I could read it, without making a big deal out of it,” said David Gabai, the Hughes-Rogers Professor of Mathematics and the chair of the department.

“This exemplifies his modest, unassuming persona.”

This finding was published in the Annals of Mathematics, one of the top journals in the field. The accomplishment landed Pardon a top honor for undergraduates, the 2012 Morgan Prize, given jointly by the American Mathematical Society, the Mathematical Association of America, and the Society for Industrial and Applied Mathematics.

As an undergraduate, Pardon also received the 2010 Barry Goldwater Scholarship, a national award for sophomores and juniors in the natural sciences, mathematics and engineering.

He also published a paper on a generalization of a solution to something called the carpenter’s rule problem, which asks whether a polygon in a plane made of rigid metal rods connected end-to-end with hinges can be moved continuously so that it becomes convex.

Pardon later went on to receive a National Science Foundation Graduate Research Fellowship to support his graduate studies at Stanford University, where he became an assistant professor after receiving his doctorate.

At Stanford, Pardon proved a special case of the Hilbert-Smith conjecture, which involves the mathematics of “manifolds” — shapes that include spheres and doughnut-shaped objects. Then he began to explore a question about intersecting shapes.

Pardon brought this question back to Princeton, where he focuses on geometry and topology. He is now counting intersections in infinite-dimensional spaces. For example, the space of configurations of a piece of string, which has infinitely many points, on a plane are infinite-dimensional. “Ideally I want to develop a frame-work for doing this that just always works and you don’t have to think about it anymore,” Pardon said.

In April 2017, Pardon received the National Science Foundation Alan T. Waterman Award, a $1 million grant awarded to early-career scientists and engineers.

On the occasional evening, Pardon can be found in an empty classroom in the mathematics building, playing Bach or Kodály on his cello. “I really cannot think about math when playing music,” he said. “Both require my full attention.”

Diamonds’ flaws hold promise for new technologies

By Yasemin Saplakoglu

DESPITE THEIR CHARM AND ALLURE, diamonds are rarely perfect. They have tiny defects that, to assistant professor Nathalie de Leon, make them ever so appealing. These atom-sized mistakes have enormous potential in technologies for high-resolution imaging and secure communication lines.

Nathalie De Leon, assistant professor of electrical engineering, is studying defects in diamonds that could lead to single-molecule imaging and quantum communications.

“Historically, people called these defects ‘color centers’ because when you shine light on a diamond you see a bunch of pretty colors come back,” said de Leon, who is appointed in the Department of Electrical Engineering. She wants to harness the properties of these defects to image molecules and proteins.

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A diamond is a tightly knit lattice of carbon atoms. By kicking out one of the carbons and adding a nitrogen atom nearby, the researchers can create a defect known as a “nitrogen-vacancy color center.” The nitrogen atom and the dangling bonds around the missing carbon atom form a sort of molecule within a small area of the diamond lattice. This area of the diamond acts like a verdant oasis in the middle of a desert, displaying very different properties than the rest of the material.

De Leon is working on using a nitrogen-vacancy color center near the surface of a diamond to capture images of molecules. The approach takes advantage of a property of the defect known as “spin,” which is analogous to the momentum of a spinning top. These spins interact with the molecule’s magnetic field, which varies from one part of the molecule to another. The signals from these interactions can be collected and processed to make an image that is very high in spatial resolution — high enough to image a single molecule of DNA.

For this to work, the only signal emanating from the surface of the diamond has to be the one from the color center. But that’s a difficult feat, as the moment the diamond is exposed to air, its surface atoms latch onto molecules floating around. Further, cutting or polishing one of the hardest materials in the world brings other unwanted defects to the surface.

All of these extra signals cloud the measurement. In fact, when researchers try to remove the unwanted defects from an initial polish, they inadvertently create more defects that again need to be removed. “You have a mouse problem, so you release the cats, and you have a cat problem, so you release the dogs. It just keeps going,” de Leon said. Finding ways to improve the diamond surface is an ongoing area of research, and de Leon is hopeful that a combination of chemical treatments and a high-purity environment might do the trick.

Color centers for communication
While these color centers may eventually serve as sensors for biological applications, they can also be the basis for new communication networks — ones that would make eavesdropping impossible.

Nitrogen-vacancy color center

Researchers led by Nathalie de Leon are turning diamonds into devices that can image single molecules. The device uses a defect in the crystal structure called a nitrogen-vacancy color center. When disrupted by the molecule’s faint magnetic field, the defect gives off red signals that can be used to construct an ultra-high resolution image of the molecule.

In quantum communication systems, an eavesdropper would not be able to read a message without immediately altering its state, thus exposing the attempt to pry into the message. It would also be impossible to copy a quantum message.

Making the signals robust enough to travel long distances has stalled the development of quantum technologies, de Leon said. She is working to build a “repeater” that can boost the signal and forward it through a cable until it reaches its destination. This would require a material capable of making quantum memories. The material would store and recover the original signal to propel the signal through the cables.

“What we are looking for is the heart of this quantum repeater,” de Leon said. Her team recently discovered a candidate for such a heart: a defect within a diamond in the form of a large silicon atom hovering between two holes in the lattice.

It turns out this defect has very good charge and light properties, two necessary ingredients for a good quantum memory. The defect is also more resilient to interference by electric fields from the environment than other approaches.

De Leon, who arrived at Princeton in 2016 after completing her Ph.D. and a postdoctoral stint at Harvard University, is now exploring how to make this quantum repeater. Her work is supported by the National Science Foundation, the Air Force Office of Scientific Research and the Alfred P. Sloan Foundation.

“Nathalie came to Princeton with materials knowledge and combined it with physics,” said Stephen Lyon, a professor of electrical engineering who directs Princeton’s Program in Engineering Physics. “There are all these quantum things that people want to do and in the end everything depends on materials — it all comes down to how you get the material to do what you want.”

De Leon wonders whether quantum communication can be made secure and robust before our current encryption schemes succumb to security challenges.

She hopes the hearts of quantum repeaters will start to beat before that happens.

Lights, camera, action – of genes in development

By Yasemin Saplakoglu

MOLECULAR BIOLOGIST MIKE LEVINE likes to recall his childhood when he talks about the reason he came to Princeton. “I grew up near Hollywood and I always loved movies as a kid, so when I saw that Princeton scientists were capturing videos of gene expression in living organisms, it personally resonated with me.”

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Levine uses live-imaging and other methods to study the regulation of genes involved in the development of an organism from embryo to adulthood. He aims to reveal the secrets of how hidden pieces of the genome precisely dictate development so that each fruit fly has two wings and each human has five fingers and five toes.

Genes labeled with fluorescent markers

Researchers in the laboratory of Mike Levine are studying the genes involved in fruit fly development using live- imaging techniques. Genes labeled with fluorescent dyes flicker on and off, eventually creating sections that differentiate into different parts of the insect’s body.

Live-imaging makes it possible to see genes in action, Levine said, sitting in his office at Princeton, where he is director of the Lewis-Sigler Institute for Integrative Genomics. He points to a video of a fruit fly in the very early stages of life. Within the football-shaped embryo, the genes, labeled with fluorescent dyes, flicker on and off, eventually creating seven segmentations across the organism. Each section will differentiate into a different part of the insect’s body. “This is a very magical period where the genes are creating the blueprint of an adult fly,” he said.

This flickering effect occurs due to bursts of activity when genes are repeatedly turned on and off within a couple of minutes. Levine, the Anthony B. Evnin ’62 Professor in Genomics and professor of molecular biology, and his team use the fly to explore how and why gene expression occurs in staccato bursts rather than smoothly, as was once thought. Many of the genes responsible for fly development were identified by Princeton’s Eric Wieschaus, a Nobel laureate and the Squibb Professor in Molecular Biology, professor of molecular biology and the Lewis-Sigler Institute for Integrative Genomics.

Mike Levine


Levine, who joined the Princeton faculty in 2015, previously studied development in the fruit fly, a widely utilized model for higher forms of life, for nearly two decades at the University of California-Berkeley. Most of those studies involved taking snapshots of the fruit fly’s growth at various times. Now, he uses the imaging technique developed by Prince-ton pioneers Elizabeth Gavis, the Damon B. Pfeiffer Professor in the Life Sciences and professor of molecular biology, and Thomas Gregor, associate professor of physics and the Lewis-Sigler Institute for Integrative Genomics, to capture live footage of gene expression.

In recent work, Levine and two postdoctoral research fellows in his lab, Takashi Fukaya and Bomyi Lim, discovered that gene activity is correlated with the frequency of bursts. The team is now exploring how the expression of genes — which genes are turned on and when — is controlled by small fragments of DNA called enhancers.

The human genome is thought to have 400,000 enhancers, yet we only have about 20,000 genes, so on average, 20 enhancers control a single gene. Understanding exactly how enhancers control gene expression is a major area of study.

“Some people call enhancers the dark matter of the genome,” Levine said. “Here we are, 36 years after enhancers were first discovered, and we’re still not sure how they work.”

Levine’s team found that some enhancers led to many bursts, whereas others led to only a few bursts, which points to their important role in gene control. Further, they found that enhancers could activate multiple genes at the same time, a finding they published in 2016 in the journal Cell, with support from the National Institutes of Health. That finding contradicted a widely accepted model of how enhancers work.

In this widely known model, the enhancer — sometimes near and sometimes very far from the gene it controls — physically loops over and latches onto the DNA, hangs around a bit to start gene expression, and then comes off and prepares for the next burst.

But the enhancer can activate multiple genes at once, so Levine and his group proposed a new model that instead involves a “hub” containing multiple proteins. In their model, the enhancer stimulates the hub to release the proteins responsible for gene activation.

Levine’s team is working on validating this model using techniques including those developed at Princeton, and he sees imaging as transforming how researchers study gene expression. “You get a different view of what is going on,” he said. “There is something about a movie that connects with the human brain.”