One thing that I've been thinking about how an industry prone to boom-and-bust might end up creating a self-perpetuating cycle.
Specifically, the finance industry. It will be shrinking industry for the next year or so, and as a result there will be fewer young people going into the sector. And when it recovers it will hire people straight out of college, leaving a "gap" to some extent. If this is sufficiently big then there at some point all the people that lived through the bust won't be around to advise against excessive risk taking from the overly ambitious newly-minted MBA, leading the cycle anew.
I honestly don't know if this generation gap will exist, or if it had existed in the past. It's just a conjecture. It predicates on the mediating force of institutional memory, and I'm not even sure that is true.
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5 years ago
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if those people still are around and in the financial services sector, they'll just be marginalized by the current crop of greedy, power/money/profit-hungry peoeple in charge. Those people will still look to exploit every loophole, get around every regulation to get a step on their compeititors and push profits up.
institional memory won't matter because those in control will say things are different this time around, we have regulations that address that now, we've learned out lesson.
should business schools, economic classes now quickly incorporate the current global financial crisis into the first lecture of the here's-what-not-to-do courses?
I think regulation and institutional memory are not mutually exclusive.
I also know for a fact that MBA schools are constructing business study cases on the current financial clusterfuck.
I interviewed with CapitalOne and I flat out asked my interviewer how they managed to not get burned from this mortgage mess. And what they did was actually pretty extraordinary.
They bought GreenPoint in 2006 with the intention of using that as a platform to start an alt-A/subprime operation. They looked at the data, decided it was not going to be profitable, and shut the whole thing down
In 2006.
This might sound like a east thing, but think about how hard it is for a company to pull up stakes like that- WaMu couldn't do it, ACC couldn't do it. There are way too much institutional pressure to keep going down that path. So the question is, how did CapitalOne resist that siren call?
To the Neighbors!
I'm in MBA school right now and hope to become of the greedy freshly-minted finance professionals when I graduate in 2 years.
But seriously, my professors have been using numerous examples of the Financial Sectors gross indiscretions. The Human Organizations prof. mentions the psychological idea of social conformity where an analysis or broker would look around at what his peers are doing and "think" its fine because everyone is doing it. Psychologists have done studies confirming this behavior in all sorts of contexts.
The Accounting prof. predicted this happening over 2 years ago when he realized that banks like MaMu and Citi where way under-provisioned in their allowances for credit losses (relative to historical figures). He still thinks BoA's balance sheet's out of whack with reality and is highly critical of their aquisitions of Countrywide and Merril.
Even the solutions are under debate. My econ prof. questions Obama recovery plan, stating he would prefer to see more gov't funds allocated to investing in infrastructure, which brings future benefits, vs. trying to increase consumer spending.
And this is the part where I think institutional memory matters. You had a entire generation of mortgage brokers who graduated from high school and were pulling down $100K+; each month.
For them, they had no idea what a downturn looks until it steamrolled them over. They thought this easy money would last forever!
A lot of people have said something along the line of: "sure they're out of a job now, but given how much money they got during the boom time, I wouldn't mind being in their place."
I for one does envy them in the least bit. They lost everything (why save when this was going to last forever?). Can you imagine the sheer humiliation of driving a Ferrari one day and having to move back in with your parents soon after?
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