The dam burst of banking disasters and federal bail-outs of firms “too big to fail” has brought to light the fragility of our banking and investments system. Like a tropical depression that forms in the eastern Atlantic ocean and gradually feeds on the warm waters and moist air until it makes landfall as a rampaging storm, the combination of greed, financial deregulation, and enthusiastic liquidity on the part of the Fed has now spun up into a full fledged economic storm.

In an essay posted on CNN.com, Columbia Professor Joseph Stiglitz, among others, points to some causes of the present calamity on the banking and financial businesses. Stiglitz says-

“One can say the Fed failed twice, both as a regulator and in the conduct of monetary policy. Its flood of liquidity (money made available to borrow at low interest rates) and lax regulations led to a housing bubble. When the bubble broke, the excessively leveraged loans made on the basis of overvalued assets went sour.” 

“The new “innovations” simply hid the extent of systemic leverage and made the risks less transparent; it is these innovations that have made this collapse so much more dramatic than earlier financial crises …”

The mess that taxpayers and investors are left with is the result of greed and wrecklessness on the part of elite “business leaders” in conjunction with Federal officials only too anxious to deregulate and discount. This is not a failure based on physical reality. It is a failure based on greed and poor judgement. It rests on a morally shallow and sadly misguided philosophy that mere acquisition of currency is reason enough for being and is the sole measure of success.

As a start, it is my hope that the Deans and faculty of our business schools can summon some kind of movement to reform their admissions standards and refine their ethics curricula.

Perhaps certain finance practitioners need to be trained and certified in a manner similar to actuarial professionals?  Seems to me that the people who launch financial instrument schemes with the potential to collapse an economy should be at least as well trained in risk management as an actuary.

A firm proposing a financial instrument for sale to the public should be required to prepare a mathematical model with macroeconomic inputs to model the potential for instability. The kind of discipline needed to do this modeling could help people refine the fund structure so it remains manageable in a broader range of economic conditions. This would also provide for a real transparency to regulating agencies and possibly even investors.  But most importantly, if you want to model it, then you have to understand it. And that is part of what has been lacking.

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