Why would anyone give financial bubbles a bad review? They are like history?if you don?t learn lessons from them, you are bound to repeat them.
The bubble is an apt metaphor here?to asset or stock prices that are inflated beyond all rational proportions inside a brittle structure that can be expanded based on nothing but speculative air, and vulnerable to a sudden burst. Major speculative bubbles have been known to occur from time to time, with ruinous effects. The first recorded one, perhaps, dates back to the 1630s: the spontaneous tulipmania that struck Holland in a period called the Dutch Golden Age. From tulips, bubbles have migrated to stock markets and real estate, and then to virtually every sector of economy as the process of globalisation speeded up in the last century. And, small investors and common people were left carrying the can of financial ruin.
A few famous examples of economic bubble that occurred over the last century are the US stock market crash in the 1920s that caused the Great Depression, the commodities bubble of the 1970s, the Japanese real estate bubble in the 1980s, and the dotcom bubble that burst in the late 1990s. Then came, in 2008, the Great Recession that had its roots in the US subprime mortgage crisis.
Sometimes, the bubbles are triggered by pure and instantaneous speculation, as the case with the tulip craze in 17th century Holland. Sometimes, by the manipulative actions of individuals or corporations, as happened during the Great Depression. Or by complex financial alchemy and the rationalisation of excessive greed in the name of excessive risk, in the case of the Great Recession. Or when financial transparency is opaque and unfair to investors, as in the case of Dubai?s ostentatious infrastructure projects and palm-shaped tourist resorts that proved to be nothing more than an Ozymandian dream in the midst of the debt standstill crisis that swept the emirate in 2009.
Yet, the devil is in the details. As long as hedgings and bettings broke no laws, there was nothing legally wrong about them or even the unpleasant spectacle of them coming unstuck. If economic bubbles have hijacked public policy, it?s because of the failure of regulators to set the rules and enforce them when its practitioners were operating at the edges. The regulators happily relaxed the rules at every turn, accelerating the natural pricking of every bubble. So, in the words of a Western analyst, ?when the ceiling caves in, it?s scorpions versus tarantulas?. Indeed, a repugnant ending to an imbalanced interplay between ethical and regulatory responsibilities.
But then, what?s there to learn from bubbles? Why are they relevant to management education? The answer is provided by premier B-schools like the Zicklin School of Business at Baruch College in the US. When Zicklin introduced, in the wake of the Great Recession, a course last year on the long history of financial bubbles and its relation with economic ups and downs, it was trailing a blaze in management studies. The course was not only embraced by students enthusiastically, but it also won the B-school much critical acclaim from management gurus in the US.
As B-schools in India make amends to their curriculum in the wake of the financial crisis that engulfed the Western model of capitalism during 2008-09, they require bigger shifts than a cursory look at the history of financial skullduggery. It?s an issue alive to corporate governance and the concomitant ethical duties that won?t improve through management education business-as-usual.
?Three distinctive developments in finance are linked with one another: the huge growth of derivatives, the decomposition and distribution of credit risk through securitisation, and the formidable combination of mathematics and computing power in their application. All these attributes of high finance entail inherent risks, but risk management was left at the mercy of a few self-proclaimed wizards who never cared about the consequences of their actions. A proper education and training that will build knowledge and competence to cope with this type of scenario are essential to avoid future catastrophes,? says Ahindra Chakrabarti, professor with International Management Institute, Delhi.
If the study is relevant in the US, why not in India? As Anvay Bhargava, faculty of Jaipuria Institute of Management, Jaipur, put it: ?If we reflect on the Enron case,?we will discover that a number of symptoms were common with that of Satyam. It is not that there have been failures in the US alone. We have to our credit a large number of scams? like CB Bhansali, UTI 64, Ketan Parikh, Harshad Mehta, Satyam, etc. The?difference between the US and India is that while the failures were absorbed by few regions in India, the bubbles in the US were very large in size and the tremors of bursting were felt globally. Besides, due to the conservative policies of our government, we have been more or less insulated from global crises like the subprime and Dubai crises.?
Sapna Popli, director of IILM Institute for Higher Education, Delhi, agrees. ?New lessons can be taught through the integration of corporate governance and compliance to accounting standards in finance and accounting courses. It can be done though increased focus on regulatory aspects of financial engineering,? she says.
According to Bhargava, the world financial crisis of 2008-09 provides several leads for formatting a course. ?As financial innovations, derivatives were introduced and manipulated to get supernormal profits. There had been no major change in the value of underlying asset compared with derivatives. This whole cycle of trading in virtual assets created conditions where at the peak, nobody was there to pump more money and this led to the economy to crash. During bad times, people think of saving that leads to money shortage in the market and hence, business suffers. This suffering leads to people getting pink slips. If this vicious cycle and its causes are covered in any course, we can avoid or at least mitigate the intensity of such financial bubbles from occurring in coming times,? he says.
Speaking about the Zicklin course, Andrew Rodman, an adjunct lecturer of economics and finance and a former Wall Street executive, told The New York Times that the course on financial bubbles could highlight recurring themes??what has gone wrong, what has gone right, what elements precede most crises, which repairs work?.
That was pretty sobering talk from someone with years of experience in the Wall Street. And, it was right on the money invested?and then, burnt?in all financial bubbles put together.
?rajiv.jayaram@expressindia.com