Saturday, April 11, 2009

Navel Gazing at Hahvard

This item can be filed either of two places, Closing the barn door (too late) or Putting the poop back into the elephant (once it's in the street). Harvard Publishing is running a series called "How to Fix Business Schools." I like the choice of the word "fix" rather than something more prissy. It goes to the heart of what happens when something is broken. Or needs to be castrated.

From The HBR Debate: Round 2

This week, we added a second set of debates to our online colloquium about how to fix the business schools - with an eye to assuring that their graduates, in the future, don't create any more economic disasters.

Stanford's Bob Sutton started off the week with a "J'accuse": economists, who tend to dominate business school faculties, teach students models that reinforce their greedier instincts.

Steve Kaplan, an economist from the University of Chicago's Booth School, wasn't about to take that lying down, responding that "In arguing that economists assume too much self-interest, Sutton (and Joel Podolny) appear to pine for a world that does not exist. Human beings are self-interested today and they always have been." Kaplan also agreed with Steve Kerr of Goldman Sachs that, thanks largely to the work of economists, the world economy is strikingly better off today than it was 20 or 30 years ago.

On Thursday, Roger Martin of the University of Toronto's Rotman school and a proponent of "integrative thinking" joined the fray. He remarked that schools are too apt to teach students complex models - hammers to which everything looks like a nail. "Most MBA programs are taught in such a way that rather than owning the models, the models own students." As a result, students graduate with knowledge of models that they think apply to all circumstances, when this is not the case.

&c., &c., &c....
Links galore at the site if anyone is interested. I want to comment further but when I try it comes out all snarky. As the reader can tell, that's not really my style.

I want to see a reflective series by members of the esteemed faculty describing in detail how it felt last year when they hit that "Oh, shit" moment.

Rather than leave the reader with the impression that my attitude is completely sour on Harvard and its peers, here is a video from those hallowed halls illustrating in dry, tedious detail how even at the highest levels of academia they still haven't devised a way to spin straw into gold. I invested over an hour of my life yesterday morning watching this lecture by Josh Coval explaining what they euphemistically call "The Economics of Structured Finance."

Not for the feint of heart, the actual lecture is only 45 minutes long, followed by a question and answer period. After watching I have a better grasp of the magnitude of what the world financial community is trying to unwind. The more I learn the worse I feel, but it's like hearing a diagnosis of some terrible disease. At some level it helps just to have a name for it, even if the prognosis is uncertain. Until now no one that I have heard has said so but reading between the lines I sense that all kinds of debt obligations have been bundled, sliced, diced and repackaged as what laymen now call "toxic assets." The toxicity lies less with the threat of payment defaults and more with the shrinking values of collateral.

At the start of this lecture, the professor says clearly that "you can do this with all kinds of card receivables, from home loans to mortgages, you can do it with the bonds that come out of these pools... a second layer on, you can do it with corporate bonds, you can do it with private equity loans...a huge variety of credit-sensitive securities..."

If you go no further than three and a half minutes into the lecture you are already way past what the man on the street thinks he knows. If you make it half way through you may experience (I just love it when I get to use a buzz term) a paradigm shift in how you view what the talking heads call the credit crisis. Embedding of the video is not available but that's not important. I doubt that anyone besides me will have the patience to watch the whole thing. I can save you some trouble and sum it up in brief: The global economy is in a really deep mess and the smartest minds in the world are trying to figure out what to do about it.

Ironically it began and grew because the same "smartest minds" made some really bad judgment calls. In the same way that termites destroy a house, or a MRSA infection brought home from the hospital kills a patient, the world's financial community has a very serious problem to resolve. Part of the problem came about because of what has been labeled, also euphemistically, shadow banking. Go ahead and do your own Google search. You'll find over four million hits.

In a continuum of economic taxonomy with banks at one end and the drug trade at the other, shadow banking is about midway, somewhere South of loan sharks and corporate embezzling and North of kidnapping for ransom. These are the people that a few voices of elected representatives continue to argue against regulating.

No comments: