Monday, January 26, 2009

The Real Cause of the Financial Crisis

Yes, yes, we have all heard the roots of the financial crisis traced to loose expansions of credit. But what were the factors that led to those policies? Here's one writer's opinion. Ranking just above the increase in "casual dress" policies (huh??), business school education gets the blame.
When it comes time to write the history of the decline and fall of the United States of America, what will be the major themes? Imperial overstretch, failure to address the problems of the time and the enervation of the people will all figure prominently, just as they have in previous national decays. Some of my personal favorites are destruction of the essential and honored professions of journalism and the law, and the rise of “casual dress.”

But those future scholars will find a target-rich environment in yet another place: the rise of the business school and the primacy of “financial services” in American society. Not for nothing was America’s self-destruct sequence set off by the first president with an MBA. It was no coincidence that the most catastrophic economic event since the Depression (and maybe worse) was caused by the top graduates of the nation’s leading business schools working with their infallible computer models.
Having received an MBA education, I can attest that the author's perspective contains more than a few inaccuracies. The most glaringly obvious to readers of this blog is that MBA students are taught that "mergers [are] always beneficial."


  1. While I disagree with the "mergers are always beneficial" statement, I think that the author raises a great point regarding the proliferation of financial services. While in b-school, I learned that the essence of business was to move assets to the highest valued use from one Professor Froeb. I also learned that there was a fine line between capitalism and greed. Classes like microeconomics, managerial accounting, marketing, operations, and organizational behavior made a lot of sense and the concepts resonated with me. But as we ventured into financial accounting, corporate financial policy, and macroeconomics, I sometimes found myself a bit confused. I questioned whether I had the intelligence to grasp some of these abstract concepts that were taking hold in the market place. At the time, I just basically dismissed my lack of understanding as perceived weaknesses in my business tool box. But low and behold as we have moved a few years down the road, I am now discovering that the individuals that professed to understand these concepts did not really have a clue themselves. None of it made sense as they crossed that line between capitalism and greed and leveraged creative financial instruments. Unfortunatley capitalism is becoming synonymous with greed and the line has become blurred. And unfortunatley the global economy could falter as a result of that blurred line. True capitalism will prevail. Business will always be about moving assets to the highest valued use, and we may be on the way to more primitive practices. For example, a former Wall Street Investment Banker may have to shine the shoes of the owner of a hot dog stand as he creates value.

  2. I agree that a lot of people practicing finance didn't really appreciate or understand what they were doing. But, I think it's a pretty big leap to say that business education caused the problem. Perhaps the author's point is that business education instills a false sense of knowledge - overconfidence in one's skills in manipulating these financial weapons of mass destruction. Maybe there's some validity there. Sounds reminiscent of the Nobel prize winners who ran Long Term Capital Management into the ground.

  3. I agree. In b-school our professors teach us how to properly use these tools. However, like any powerful tool in the hands of the wrong individual, if not used properly, someone can get hurt. I think that there were individuals using these tools in a wreckless fashion.