Introduction
Gerald Rosenfeld and Leslie Cohen Berlowitz
Although it began with the failure of subprime loans and mortgage-backed securities, the most recent financial crisis has touched every aspect of our society and called into question many of the basic assumptions by which we have lived for the last fifty years. It has been the ultimate interdisciplinary dilemma, implicating technological innovation as much as financial innovation, scholarly theory as much as global realpolitik. The essays collected in this volume reflect the range of causes and examine many of the consequences.
But this volume does not merely rehearse the well-documented errors, failures, and misfortune that resulted in the panic of Fall 2008. Instead, it seeks a way forward.
In December 2009, with guidance from Jay W. Lorsch and Rakesh Khurana, the American Ƶ of Arts and Sciences and New York University School of Law convened a group of distinguished scholars and business leaders to help consider what we have learned from the recent economic crisis. (A list of conference attendees is included at the end of this volume.) The discussions and essays resulting from this meeting are presented here.
Since its founding, the Ƶ has studied the American business enterprise. At a meeting in 1781, Ƶ Fellows resolved to “attend to the subject of the Commerce of America, to enquire into the principles on which it has been heretofore conducted and the effect of those principles as the balance of trade, to investigate the most advantageous sources of future trade both in a commercial and political view and particularly to consider the subject of money the medium of trade.” Recent examinations include the 1988 study “The U.S. Business Corporation: An Institution in Transition” and a project on “Corporate Responsibility,” led by Martin Lipton, Jay Lorsch, and Larry Sonsini. The latter brought together leading scholars and practitioners to reflect on the corporate scandals of the early 2000s. The first publication of the project, Restoring Trust in American Business (MIT Press, 2005), featured essays by eighteen prominent scholars and business leaders, including John Reed, Felix Rohatyn, and John Biggs, who examine the failure of “gatekeepers” to stand between corporate misconduct and the public interest.
In that volume, Mark Roe predicted that the failure of Enron, WorldCom, Arthur Anderson, and other giants in the early 2000s would not be the last of the major corporate cascades. “If we’re lucky,” Roe commented, “someone will anticipate the problem and fix it up beforehand. If not, we’ll muddle through once again.”
The articles in this present volume offer more than one way out of the most recent muddle.
Roger W. Ferguson, Jr., begins by proposing a holistic approach to financial management, one that attempts to “align the interests of employers and employees, sellers and consumers, issuers and investors.”
Myron S. Scholes argues that financial innovation has been crucial to the development of a global economy; he asks regulators responding to the collapse to consider the benefits of innovation as well as its costs. Jeffrey Wurgler focuses on one such innovation, the expansion of index-linked investing, and the cost of the “economic distortion” resulting from the growing popularity of indices.
David A. Moss discovers in the financial history of the past century a “deregulatory mindset,” a null hypothesis among economists and academics about the inability of government to remedy market deficiencies, which may have been a self-fulfilling prophecy. Challenging the importance of an antigovernment mindset as a root cause of present difficulties, Simon M. Lorne argues that the crisis is the result of three discrete deregulatory actions by Congress and the Securities and Exchange Commission. He concludes that the crisis is a failure of people rather than institutions.
Justin Fox examines the crisis as a particularly complicated example in a long history of “manias and panics” driven by the pairing of “financial craziness and media innovation”—in this case, the decline of traditional media companies and the burgeoning of digital sources. Jeff Madrick continues this analysis by focusing on the diminished opportunities for analytical business reporters and the bottom-line pressures that influence editorial decisions in the new media environment.
Finally, Jagdish N. Bhagwati explains how a globalized economy has maintained a high level of trade activity, despite the severity of the world crisis, and why the international community has eschewed tariffs and protectionism in response to financial collapse.
The Ƶ could not have prepared this volume without the invaluable contributions of our co-editors, Jay Lorsch and Rakesh Khurana. William Allen and Robert Merton also assisted as we planned the conference. We are grateful to Richard Revesz, who made the resources of the New York University Law School available to us for the conference. We also want to thank John Tessitore, of the American Ƶ staff, for his contributions to this project.
Gerald Rosenfeld
Senior Advisor to the CEO and Vice Chairman of U.S. Investment Banking, Lazard Ltd.;
Distinguished Scholar in Residence, New York University School of Law; Clinical
Professor of Business, New York University Stern School of Business
Leslie Cohen Berlowitz
President and William T. Golden Chair, American Ƶ of Arts and Sciences