Are America’s great universities still the stalwart custodians of knowledge, leading forces for technological progress, and providers of opportunity that they once were? Or have they become, in part, unscrupulous accomplices to increasingly rapacious economic elites?
Towards the end of Charles Ferguson’s Academy Award-winning documentary Inside Job, he interviews several leading economists regarding 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 these prominent academics received significant sums to promote the interests of large banks and other financial-sector firms. As Ferguson documents in the movie and in his recent sobering book, Predator Nation, many such payments are not fully disclosed even today.
Predation is an entirely appropriate term for these banks’ activities. Because their failure would traumatize the rest of the economy, they receive unique protections – for example, special credit lines from central banks and relaxed regulations (measures that have been anticipated or announced in recent days in the United States, the United Kingdom, and Switzerland).
As a result, the people who run these banks are encouraged to assume a lot of risky bets, which include pure gambling-type activities. The bankers get the upside when things go well, while the downside risks are largely someone else’s problem. This is a nontransparent, dangerous, government-run subsidy scheme, ultimately involving very large transfers from taxpayers to a few top people in the financial sector.
To protect the scheme’s continued existence, global megabanks contribute large amounts of money to politicians. For example, JPMorgan Chase CEO Jamie Dimon recently testified to the US Senate Banking Committee about the apparent breakdown of risk management that caused an estimated $7 billion trading loss at his firm. OpenSecrets.org estimates that JPMorgan Chase, America’s largest bank holding company, spent close to $8 million in political contributions in 2011, and that Dimon and his company donated to most senators on the committee. Not surprisingly, the senators’ questions were overwhelmingly gentle, and JPMorgan Chase’s broader lobbying strategy appears to be paying off; “investigations” of irresponsible and system-threatening mismanagement will likely end up as whitewash.
In support of their political strategy, global megabanks also run a highly sophisticated disinformation/propaganda operation, with the goal of creating at least a veneer of respectability for the subsidies that they receive. This is where universities come in.
At a recent Commodity Futures Trading Commission roundtable, the banking-sector representative sitting next to me cited a paper by a prominent Stanford University finance professor to support his position against a particular regulation. The banker neglected to mention that the professor was paid $50,000 for the paper by the Securities Industry and Financial Markets Association, SIFMA, a lobby group. (The professor, Darrell Duffie, disclosed the size of this fee and donated it to charity.)
The answer presumably is that Stanford University is very prestigious. As an institution, it has done great things. And its faculty is one of the best in the world. When a professor writes a paper on behalf of an industry group, the industry benefits from – and is, in a sense, renting – the university’s name and reputation. Naturally, the banker at the CFTC roundtable stressed “Stanford” when he cited the paper. (I’m not criticising that particular university; 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 out of control. I agree, but reining it in will be difficult as long as the universities and “too big to fail” banks remain so intertwined.
In this context, I was recently disappointed to read in The Wall Street Journal an interview with Lee Bollinger, President of Columbia University. Bollinger is a “class C” director of the Federal Reserve Bank of New York – appointed by the Board of Governors of the Federal System to represent the public interest.
In what was apparently his first-ever interview or public statement on banking-reform issues (or even finance), Bollinger’s main point was that Dimon should continue to serve on the board of the New York Fed. He used surprisingly nonacademic language – stating that “foolish” people who suggest that Dimon should resign or be replaced have a “false understanding” of how the system really works.
I am currently petitioning the Board of Governors to remove Dimon from this position. Nearly 37,000 people have signed the on-line petition at change.org, and I am optimistic that I will have a meeting soon with senior Washington, DC-based Board staff to discuss the matter.
Bollinger’s intervention may prove helpful to Dimon; after all, Columbia University is one of the world’s best-regarded universities. On the other hand, it could also prove productive in advancing the public debate about how “too big to fail” bankers sustain their implicit subsidies.
I have written a detailed rebuttal of Bollinger’s position. I hope that Bollinger, in the spirit of open academic dialogue, replies in some public form – 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 unhealthy relationship between universities and subsidized global financial institutions, such as JPMorgan Chase.