Monday, November 10, 2008

The meltdown is my fault

Joe Rightwing is still writing to newspapers, trying to blame the financial meltdown on the government.  Like many of his fellow letter writers, Joe condemns the 1977 Community Reinvestment Act, which pressured lenders to help low-income people buy houses, as a market distortion.  Without the CRA, Joe claims, the free market would have kept the economy as level as the Bonneville salt flats. 

This is the height of silliness, for many reasons.  First, the CRA did not force banks to give $300,000 mortgages to people who could only repay $100,000 loans.  What’s that you say, Joe? There are no more $100,000 houses? Tell ya what: The government never prevented builders from erecting cheap houses.  Builders don’t like to build them because they’re less profitable.  That’s the free market at work.

I mean, really, Joe, this is the kind of “devil made me do it” excuse we wouldn’t accept from a six-year-old.

Second, the economy is cyclical whether it’s regulated or not.

Third, the Enron scandal was a wake-up call, and Joe, you didn’t wake up, didn’t even stir an eyelash.  Six years later, Lehmann Brothers is gone too.  Joe, now that you’ve been smacked on both sides of your head, smell the coffee: The free market is good, but people abuse the free market.

Mortgage brokers knowingly sold loans to unqualified buyers. (Economists call this “adverse selection.”) Middlemen securitized bundles of loans, could not even begin to measure the risk of a bundle (nor, therefore, its value), pulled a value out of where the sun don’t shine, and sold it to Lehmann Bros., who, forgetting the business cycle, bought the whole mess, lock, stock and barrel.  If this ain’t abuse, beat me with a stick.

You don’t think regulation is needed, Joe? I quote Joel Bakan: "No one would seriously suggest that individuals should regulate themselves, that laws against murder, assault, and theft are unnecessary because people are socially responsible. Yet oddly, we are asked to believe that corporate persons… should be left free to govern themselves."

Joe, I’m sorry if I implied it’s only you whose been hit on the head.  We’ve both been smacked.  In fact, it was only a matter of time before somebody blamed business educators for this mess.  And now, Joe, some of your fellow letter-to-the-editor writers have snarkily noted that most of the free market abusers have… MBAs.

And they’re right.  Mea culpa, Joe.  I’m a professor, and my ex-students did this.

At the 2002 meeting of the AACSB, the agency that accredits business schools, I waited anxiously for its officials, or any faculty speakers, to mention the word “ethics.”  None did.  The only speaker at the three-day conference to bring up ethics was a luncheon presenter, the CEO of Tupperware.  (There you go, Joe, I’m not anti-business. I make a point to note that in the close wake of Enron, it was a businessman, not an academic, who first said something was amiss ethics-wise.)

AACSB’s 2008 meeting was similarly light on angst about the mortgage crisis.  But it was in Honolulu, where it’s difficult to get too worked up over anything.  A few months later, the INFORMS conference – the gathering of operations researchers – focused on technical reasons why the financial engineering models didn’t work.  Not on the ethics of using them when doing so was clearly inappropriate.

At least at the University of Chicago there’s some disagreement about whether to name the new economics research institute after Milton Friedman.  At least there’s that.

The upshot is that business faculty are not exactly hammering away at this in MBA classes. How can we prepare the next generation of business leaders if we do not make it clear in every accounting, finance, O.R., marketing, and strategy class that responsible users of the free market cannot tolerate certain behaviors?

University faculty cannot make students or graduates act ethically.  But if pressure to act ethically does not begin in b-school, it’s a lot less likely that it will begin later.  MBA graduates were the ultimate cause of this crisis, but business professors were the proximate cause.

Fellow faculty members, repeat after me, and make sure Joe hears you: “The meltdown is my fault.”

1 comment:

peifang said...

Good point. I am in favor of your points. More we learn, more we want. All what we can learn from school are knowledge but not morality. ~Teresa Weng