Richard A. Cosier: Dean and Leeds Professor of Management, The Krannert Graduate School of Management, Purdue University
So how did we get into this global economic crisis? Until some time in late 2007 or early 2008 things were seemingly going along quite well. The vast majority of the world's major economies were expanding and many people were enjoying their improved prosperity. Financial markets were reaching new high levels and many graduate business students around the world dreamed of lucrative investment banker positions after graduation. The growth cycle seemed well established and for some, things looked too good to be true – in hindsight these people were correct.
Economies around the world, in fact, had overheated. In the United States home prices had spiralled upward at dizzying speeds. Individual and corporate debts were at all time highs. Leverage was the means for achieving growth and enjoying the benefits of the growing economy. In many business schools, students were flocking to Finance with hopes of participating in the explosion of wealth enjoyed by some of their recently graduated role models who were making six and seven figure incomes from the creation and sales of “exotic” financial instruments.
We are now well aware that there were underlying problems which caused the story to take an ugly turn. Most of the world is now experiencing the worst economic period since the late 1920s and 1930s Great Depression. The current situation is being called a severe global recession but to many it feels like a depression, especially to those who are unemployed or have seen their retirement savings evaporate.
Predictably, people are looking for the culprits who caused this massive economic meltdown. Some are pointing fingers at the business schools and MBA programs around the world. I, however, am not one of those placing blame on business schools. In my opinion there are two fundamental causes of the economic woes we are experiencing.
First, I suggest that widespread personal greed was a major cause of the economic turmoil. Individuals lost track of the common good and longer term concerns and attempted to maximize short term personal gain. Investment bankers eagerly counted their windfall profits from trading in sub-prime financial products and other derivatives. Buyers felt they were assuming little risk in purchasing these products as they were able to purchase insurance on the various options. Using 20-20 hindsight these sub-prime and other “toxic” derivatives were highly risky and involved loans made to unqualified borrowers.
This brings us to the second cause of the economic crisis – excessive leverage. Credit and loans were too easy to obtain. The most obvious sector that was over-leveraged was real estate, especially in parts of the United States like California, Arizona and Florida. Borrowers with little or no tangible assets were being given 80-100 per cent loans with "hidden" escalating interest rates. The idea was that if these borrowers defaulted, the rising real estate values would eliminate the risk to the lender. Sounds like the house of cards situation where the rosy picture was very misleading – risk was much higher than many apparently believed.
In the United States, the Federal Reserve policies didn't help matters by keeping interest rates very low between 2002 and 2004. Again, with the intention of keeping credit flowing, the economy was heading for a meltdown.
If personal greed and excessive leverage were at the bottom of this economic decline, what role did business schools play in the debacle? Critics claim that business schools must have ignored educating students on topics such as ethics, social responsibility and integrity. They imply that Finance courses taught students how to create "innovative" financial instruments and then to use these tools to maximize personal gain. I beg to differ. In my experience of visiting and reviewing programs of business schools around the world, the vast majority have courses, lectures and distributed ethics and social responsibility content throughout the curriculum. Certainly there is a debate amongst some faculty members about the role of agency theory and maximizing the stakeholders' value when considering the social responsibilities of businesses around the world. And most business schools teach about various financial instruments and derivatives. But that is what academic freedom is all about! Let's hope that we never resort to censorship in the classroom when teaching about financial instruments.
People make decisions based on personal values that are formed throughout their lifetime, and reflect myriad external and innate sources. Business school graduates are not programmed like robots during their education experiences to do evil things. However, if someone decides to use their knowledge for personal gain at the expense of others, they may very well create problems in our society. This is especially a concern when credit and interest rate policies made it "easy" for some to abuse the responsible use of credit and leverage.
The future will see changes in business schools reflecting this historic economic collapse. First of all, there will be a vast amount of research devoted to diagnosing in great detail what happened. My opinions will, and should be subject to empirical investigation for example. Future dissertations will include questions of diagnosis and prognosis. You see I believe that business schools are actually part of the solution, not the problem. Research will help explain and prevent future global economic meltdowns. Secondly, the need to continue and expand coverage of ethics and social responsibility of business in the curricula will be apparent. Students need to be aware of the consequences of their decisions. Having said this, the role of finance and financial tools will continue to play a major role in our curricula as well, as it should. Thirdly, the need to teach business within a global context will become even more acute. Economic impacts are felt around the world whenever a major economy experiences challenges. It is also clear that developing economies need the attention and expertise from business school educators.