Are America’sgreat universities still the stalwart custodians of knowledge, leading forces fortechnological progress, and providers of opportunity that they once were? Orhave they become, in part, unscrupulous accomplices to increasingly rapacious economic elites?
Towards the end of Charles Ferguson’s Academy Award-winningdocumentary Inside Job, he interviews several leading economistsregarding their role as paid cheerleaders for the financial sector’s excessive risk-taking and sharp practices in the run-up to the crisis of 2008. Some of theseprominent academics received significant sums to promote the interests of largebanks and other financial-sector firms. As Ferguson documents in the movie and in hisrecent sobering book, Predator Nation,many such payments are not fully disclosed even today.
Predation isan entirely appropriate term for these banks’ activities. Because their failurewould traumatize the rest of the economy,they receive unique protections – for example, special credit lines fromcentral banks and relaxed regulations (measures that have been anticipated orannounced in recent days in the United States,the United Kingdom, and Switzerland).
As a result, the people who run these banks are encouragedto assume a lot of risky bets, which include puregambling-type activities. The bankers get the upsidewhen things go well, while the downside risks are largely someone else’sproblem. This is a nontransparent, dangerous, government-run subsidy scheme,ultimately involving very large transfers from taxpayers to a few top people inthe financial sector.
To protect the scheme’s continued existence, global megabanks contribute large amounts of money topoliticians. For example, JPMorgan Chase CEO Jamie Dimon recently testified tothe US Senate Banking Committee about the apparent breakdown of risk managementthat caused an estimated $7 billion trading loss at his firm. OpenSecrets.orgestimates that JPMorgan Chase, America’slargest bank holding company, spent close to $8 million in politicalcontributions in 2011, and that Dimon and his company donated to most senatorson the committee. Not surprisingly, the senators’ questions were overwhelminglygentle, and JPMorgan Chase’s broaderlobbying strategy appears to be paying off;“investigations” of irresponsible and system-threatening mismanagement willlikely end up as whitewash.
In support of their political strategy, global megabanksalso run a highly sophisticated disinformation/propaganda operation, with the goal of creating atleast a veneer of respectability for thesubsidies that they receive. This is where universities come in.
At a recent Commodity Futures Trading Commissionroundtable, the banking-sector representative sitting next to me cited a paperby a prominent Stanford University financeprofessor to support his position against a particular regulation. The bankerneglected to mention that the professor was paid $50,000 for the paper by theSecurities Industry and Financial Markets Association, SIFMA, a lobby group.(The professor, Darrell Duffie, disclosed the size of this fee and donated itto charity.)
Why should we take such work seriously – or any moreseriously than other paid consulting work, for example, by a law firm orsomeone else working for the industry?
The answer presumably is that Stanford Universityis very prestigious. As an institution, ithas done great things. And its faculty is one of the best in the world. When aprofessor writes a paper on behalf of an industry group, the industry benefitsfrom – and is, in a sense, renting – theuniversity’s name and reputation. Naturally, the banker at the CFTC roundtablestressed “Stanford” when he cited the paper. (I’m not criticizing that particularuniversity; in fact, other Stanford faculty, including Anat Admati, are at the forefront of pushing for sensible reform.)
Ferguson believes that this form of academic “consulting” is generally outof control. I agree, but reining it in will be difficult as long as theuniversities and “too big to fail” banks remain so intertwined.
In this context, I was recently disappointed to read in TheWall Street Journal an interview with Lee Bollinger, President of ColumbiaUniversity. Bollinger is a “class C” director of the Federal Reserve Bank of New York – appointed bythe Board of Governors of the Federal System to represent the public interest.
In what was apparently his first-ever interview or publicstatement on banking-reform issues (or even finance), Bollinger’s main pointwas that Dimon should continue to serve on the board of the New York Fed. Heused surprisingly nonacademic language – stating that “foolish” people whosuggest that Dimon should resign or be replaced have a “false understanding” ofhow the system really works.
I am currently petitioning the Board of Governors to removeDimon from this position. Nearly 37,000 people have signed the on-linepetition at change.org, and I am optimistic that I will have a meeting soonwith senior Washington, DC-based Board staff to discuss the matter.
Bollinger’s intervention may prove helpful to Dimon; afterall, Columbia University is one of the world’sbest-regarded universities. On the other hand, it could also prove productivein advancing the public debate about how “too big to fail” bankers sustaintheir implicit subsidies.
I have written a detailedrebuttal of Bollinger’s position. I hopethat Bollinger, in the spirit of open academic dialogue, replies in some publicform – either in writing or by agreeing to debate the issues with me in person.We need a higher-profile conversation about how to reform the unhealthyrelationship between universities and subsidized global financial institutions,such as JPMorgan Chase.