What I find interesting about conversations I’ve had with people outside of the academy about the financial crisis is the readiness to blame the people who took out mortgages in areas hit the hardest with foreclosures. The argument goes something like this: foreclosure is the price you pay for living above your means.
But while substantial evidence exists to point the finger at corporate managers and CEOs who shamelessly exploited these loans to turn a quick million (or billion, in the upper echelons), the blame is not equally distributed to this tribe in the popular sentiment. It’s as if the American moral sensitivity suddenly fails when it comes to people in the highest income brackets. We would rather blame those who are now without homes than open the giant black box of our global financial system.
And what about the case of academia? Shouldn’t higher education be our voice of reason in situations such as these? Entangling endowments in the boom-and-bust financial market was irresponsible fiscal management; however, like those whose mortgages suddenly collapsed, institutions of higher education have become dependent on the success of a new global economic network that can leave them vulnerable, whether they choose to participate or not in risky investment schemes.
Mark Taylor broaches this point in his most recent monograph about reforming higher education, Crisis on Campus:
This crisis is not the result of a few rogue Wall Street bankers or mistaken models and misguided policies; it is systemic. The failure of the global financial system exposes the fragility of the new form of capitalism that has emerged in the past four decades and raises questions about its long-term viability.
Because of the interconnected nature of the global financial market, Taylor argues that another disruption based on a continuation of the current culture of practice not only could shut down institutions of higher education for good – Harvard, for example – but also cause financial disruptions around the world on a scale that cannot be predicted.
Hence, Taylor argues, the need for swift action to reform these cultures of practice before another bubble forms and bursts. Professors and intellectuals within the academy can play an important role in calling attention to and critiquing this new, risky, and unsustainable capitalism. Take for example the recent work of economists and financial analysts Sanjai Bhagat and Brian Bolton, who implicate managerial incentive structures in financial entities as a significant cause of the crisis.
As they and others they cite demonstrate, CEOs of financial institutions were not acting in the interests of loyalty to long-term shareholders (what is called the “culture of ownership”) when the bull market became exceptionally profitable, precisely because these were exceptionally risky, short-term payoffs. It is not the case, as some have suggested, that the risk associated with these “investments” went unbeknownst to the upper management. As Simon Johnson expands on this in a Bloomberg op-ed:
Too many bankers assert some version of the refrain: Fannie Mae made me do it. As the FCIC’s [Financial Crisis Inquiry Commission] report makes clear, it was the private sector that led us into the financial crisis by making massive subprime bets and then using complex derivatives deals to magnify the downside risks.
But… they also realized huge short-term returns.
Ultimately this amounts to insider trading – information about the long-term projected cash flow from a particular trading strategy is released on the bank’s schedule, which may prevent outsiders from realizing the risk until they have already invested. Managers sold personal holdings of company stock during the periods of immediate payoffs, and by the time the inevitable losses of the strategy were realized, those managers no longer held significant stock in their company. Bhagat and Bolton list the net value of trades (sales minus buys – how much they took home) by all insiders of these 14 companies from 2000-2008 is just shy of $127 billion.
And the historical trend of asset bubbles within the last two decades (ex. dot-com bubble) suggests that this latest instance is not a discrete phenomenon, but a symptom of the culture of upper-level financial business management.
Referencing Bhagat and Bolton’s call for reforming the managerial incentive and compensation structure, Johnson adds:
The government’s best intentions notwithstanding, there is no way bank executives will ever be compensated on a properly risk-adjusted basis… top private-sector bankers know when to cash out: before all the suckers get crushed. And it is cash that bank CEOs get — the chief executives of the 14 largest U.S. financial companies received cash inflow worth $2.6 billion between 2000 and 2008.
So yes, the development and subsidence of the housing bubble can be blamed on banks and bankers. We need a new economic paradigm. Academia can and should open this black box and facilitate critiques of highly destructive financial and economic practices.
While I am skeptical of Taylor’s inclusion of collaborations with for-profit businesses in his scheme for reforming academia – the lack of ethical consideration that accompanies these cultures of practice is both repugnant and contagious, and can effectively impinge on academic freedom to evaluate business conduct – I remain far more optimistic about achieving reform in higher education than in the private sector.