Investors, bankers, regulators: who is responsible for the financial crisis? The Financial Crisis Inquiry Commission (http://fcic.law.stanford.edu/report) underestimated the role of investors and focused too much on 'financial institutions' and 'regulators.' The commission's minority, or 'dissenting,' report only partially resolved the imbalance as it blamed investors for creating a 'credit bubble' which made their role seem transient. In reality, the behavior of investors is the long-run driving force behind the financial crisis and financial markets.
It is investors' money that financial institutions manage, and it's investors' demand for a rate of return on capital that is the source of, now discredited, 'financial innovation,' including mortgage-backed securities. The mentality that characterizes investors is purely monetary, or 'capitalist,' and because the financial services industry acts as their agents, investors become detached from real business issues such as quality of product and service. This detached mentality is also connected with their inability to judge risk. Low wages across the globe have helped investors accumulate wealth, and if an investor has $100 billion, a $10 billion investment does not seem such a big risk. The FCIC blamed reckless risk taking on financial institutions, but the root of it is investors and their need for returns.
Focusing too much on banking and financial institutions is not limited to FCIC. Charles Ferguson's award winning documentary Inside Job (2010) blamed financial institutions for buying off business school economists. Ferguson is right to highlight business school failings, but wrong to blame financial institutions. The process of shaping economic ideas in ways that are congruent with the accumulation of capital has a long history. Professor Rob Bryer of The University of Warwick traces the process back to Irving Fisher who developed the concept behind modern financial theory, the 'time value of money.' The years between 1880 and 1930 were characterized by labor unrest in the U.S. William Jennings Bryan, a presidential candidate, declared: "You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold." Irving Fisher developed a theory of interest and profits calculated to calm the situation by presenting a picture of economic harmony. Recent efforts made by the banking sector to buy off economists look relatively minor when viewed historically. The independence of business schools is important, and they should strive for a high level of professional detachment, but the finance industry alone is not the cause of the problem. The root of the matter is the powerful economic interests of investors.
Modern economics has become an ideological tool, seeming to promote the free market and economic opportunity, but doing so in ways that actually perpetuate wealth and privilege. Economists' focus on 'utility' and 'time value of money' generates a partial and inadequate understanding of economic reality, clouding the balance between cooperation and conflict that exists in all societies. As Naomi Klein has shown (The Shock Doctrine), ideologues and zealots pursue extreme policies when the natural counterbalancing fabric of society is temporarily damaged. Appreciating the depth and the historical roots of the ideological tendency in economics and society makes it easier to comprehend how governments are brought within the sway of investors. Here again, Inside Job tends to overemphasize the role of financial institutions in corrupting politicians and regulators.
Although economists' ideologies divert attention from social processes, events such as the financial crisis reveal the true picture. Prosperity and inequality have increased the importance of investors and their ideologies have, to an extent, permeated society, but the tide is turning. Managers and knowledge workers realize that value creation is not purely monetary but depends on quality of product. Economists' theories are retreating and new ideas like political economy interpret the 'free market' in its social context. Politicians can see the damage done to businesses and communities and they are looking for ways to rebuild. Consumers can see the limits of borrowing and are putting their personal finances back on a sustainable footing. Investors can see the danger that their elaborate veil of secrecy may be slipping.
It is not just Wall Street that needs to be occupied and reformed, but Main Street, and the process is already underway in finance, retailing, manufacturing, education and politics. Perhaps this is the time for business schools to step forward and take a radical lead. Managers have the powerful combination of technical knowledge and commercial experience and business schools can help shape a new breed of manager that understands business in its social context and uses this perspective to shape sustainable, ethical and long term business growth.
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Independent Business Schools and Blame game are not going to resolve anything .
Every time new strategies will come , new Genius will born and world will always suffer Recession . Today no one have any plan to resolve the financial crisis .
Excellent observations. Did your professors ever explain to you what it means to have a sovereign currency? Did they ever telll you that deficits in the government sector are exactly equal to savings in the non-government sector? Did they know that a sovereign currency nation can never go broke Did they tell you that the federal government doesn't tax to raise revenue? It doesn't have to as the sole issuer of the currency unit of account. Did you learn that taxation and borrowing are policy tools to stabilize aggregate demand and that's it?
The 1% new after 1971 that a fiat currency sole issuer didn't have to tax to spend. So they immediately lobbied for massive reductions in effective tax rates. Check out the CBO data 1914-2014 and you'll undersrtand how badly the rest of us have been screwed by taxation that didin't have to occur. We could have kept that income especially during periods like these with unemployment at 8-9%. We weren't taught that deficit spending should continue as long as we have not reached our unemployment target of 4-5%. When the private sector fails to invest there's only one sector left to take up the slack and that's government. Their defict is our saving.
The only way that all this will end is that there is a Total World Wide Do Over.You and all of the people that have lived and breathed this will not think Outside The Bank.
A personal example from a different time is that a very sound solution to a daunting areospace problem came not from the Engineers but from a man of the labor force.BTW his job was to sweep up the floor.
The root of the problem is the lack of Parity.The more we move away from it the worse it will get.
What would all of the people do that work in the F&I world?
What would all the people do that work in Law if there were no Crime?
When people feel a need must me met and they resolve to do whatever it may take to solve this then it will be done.Not by the insider but by the OUTSIDER.
The result a student who has been molded into the perfect asset for XYZ firm to exploit in the name of conquest over the free market. It is a culture of winner-take-all profiteering which focuses on short-term gains at the expense of long-term economic destruction under the guise of financial innovation and job creation.
The last thing business schools want to do is to produce the dreaded "marxist-socialist" financier who has been taught to question the moral implications of unfettered capitalism and to consider the long-term impacts of reckless decisions that benefit primarily the established elite. Such a student would be a blemish to any business school and would subject said school to a stigma that would most certainly take years to shake. Therein lies the problem.
Don't blame this one on Main Street. They took it in the shorts and they are picking up the tab. This was a !% gig.
Thanks for writing about this. We need to expand the conservation to get American Business back to productive capitalism after years of predatory financial engineering.