Financial globalization has generated more crises since its emergence in the 1980s than in the last century. The global system has become an echo chamber which amplifies and propagates the spill-over effects of economic and financial imbalances. In the global kettle economy, market bubbles, volatility, animal spirits and speculative herd instinct combine to create recurring financial crises whose social costs gets higher and higher. No wonder then that the social utility of finance professionals is under scrutiny in light of the ongoing drift away from the original task of finance, namely efficient intermediation between savings and productive investment to boost sustainable economic growth. Since the inception of the 2007 global crisis, a number of scandals involving greed, conflict of interest, and lack of transparency, led to a public protest that “this time, this is enough!”
The combination of economic liberalization, market globalization and the new technology revolution was to pave the way to a new sustainable economic order that would disseminate the Western socio-cultural values as well as material progress worldwide. The End of History would see the triumph of the capitalist neoliberal values combining democracy and wealth. In fact, what has emerged is Hyperfinance with its two-fold emancipation; of the economic sphere from the political sphere, and, more recently, of the financial system from the economic system. Increasingly, “free wheel” Hyperfinance flutters independently from the underlying production of goods and services in the real economy. The global financial system gets neither time nor social horizon. Its only rationality is profit and stockholder value maximization.
A number of scholars have raised doubts regarding an analytical framework where ideology takes precedence over scientific consistency. Among them, one can highlight Hyman Minsky, Charles Kindelberger, Paul Krugman, James Galbraith, Barry Eichengreen, Alan Kirman and Michael Goldberg, as well as George Akerlof and Robert Shiller, but also our friend the late Benoit Mandelbrot and his challenging fractal geometry. Nevertheless, in the classrooms, the same hypotheses, the same econometric models, and the same short-term horizon, still prevail today as before the inception of the crisis. Textbooks and lectures still rely on the efficient capital market hypothesis that states that asset prices are equal to their fundamental value. Markets are to behave like deus ex machina which instantaneously allocates resources efficiently. Why such a disregard for the real world?
The economics profession has failed once again to forecast the inevitable consequences of years of deregulation, financial liberalization, and greedy speculation within a globalized financial system. The simple reason is its focus on abstract economic agents at the expense of the social dimension of the real economy which aggregates the behavior of households, workers, investors, employers, and retirees. Teaching still holds that markets and economies are inherently stable even though the combination of herd instinct and speculation has proved deeply disruptive. Each individual, clearly, has access to a wide range of information sources, and uses ratings and rankings as well as sophisticated technology. All this firepower provides an illusion of control and convincing nonsense. Flash trading-based portfolio management boils down to keeping the automatic pilot of an Airbus in a storm. Information is not Economic Intelligence unless it is processed into careful analysis and strategy decisions.
An intellectual and academic myopia has thus prevailed in both universities and business schools. In the former, professors did not bother reading the 2007 BIS Annual Report which sent warnings of mounting financial risks: “Clear signs emerged that excessively optimistic expectations might have been boosting the recent growth in activity. In the fast growing mortgage market, securitization has often led to an erosion of credit standards.”. In the latter, prominent industry luminaries and practitioners boast their first hand market experience but they often lack a critical view of their own technical skills. Academic finance curricula claim that “Coming out of such a master program you can hit the ground running." More practically, the trader might get laid off abruptly when the next crisis hits and he will end up selling hamburgers.
Observing a number of “plain vanilla” Master programs in finance gives a feeling of time suspension. The quantitative pavlovian finance is still well promoted and teaching is rooted in financial engineering including technical analysis and chartism, derivatives and structured products, econometric modeling, stochastic calculus, Algo trading and the like. Little time is devoted to giving students some background in the history of economic thought and of financial crises so that they see where finance fits in and what its social functions should be.
All in all, promoting a sustainable finance depends as much on an academic revolution as on radical policy decisions taken in G20 meetings. What is needed is a delicate rebalancing between technical tools and grasping the institutional and structural dimensions of the financial markets. This requires putting a new emphasis on compliance and regulation, law, financial crisis analysis, Economic intelligence, psychology, and ethics. These fields will give rise to tomorrow’s jobs. Meanwhile, banks have announced thousands of job cuts in the summer of 2011 as they seek to reshape their businesses in the face of a slump in investment banking profits. It is somewhat an irony that this welcome shift is being supported by a Goldman Sachs’ Executive Director who notes: «The focus on more prudent investment strategy has never been greater. The compliance teams are there to ensure banks work in line with the regulations imposed in the country in which they’re operating”. Market finance would also benefit from a gender rebalancing as good financial analysts need more neurons than testosterone. Male risk managers tend to focus on fast, short-term abstractions, while the feminine mentality is more concerned with the importance of social relations on the ground--a more concrete, slower and usually more ethical dimension.
All in all, universities and business schools should be at the forefront of in depth rethinking of academic programs in finance. Their commitment is not only to load the job market with young professionals, but rather to provide students with the intellectual tools to bring social value to a field that is saturated with “value at risk”.