B-Schools: Perspective on Financial Crises

In times of crisis, perspective helps. With the staggering financial events of the past week, business schools have been called upon by the public, businesses, and policymakers to help give historical background and guidance in what many observers consider to be uncharted and frightening economic territory.

As the year-old crisis reached a more acute stage this month, business schools began fielding a legion of requests from the media for explanation. At the same time, faculty members were busy talking to companies where they consult or serve as board members about the implications for their businesses.

Whether they're talking heads on the nightly news or acting as economic advisers to Presidential candidates, business school professors agree that the key role for business schools right now is putting the economic disorder in context. "It is difficult for most people to fathom the billions of dollars that are being lost in value or used as bailouts and to be able to follow all of the twists and turns. The key questions I get asked are: 'How did this happen' and 'what does this mean for the average investor?'" Steve Foerster, professor of finance at the Richard Ivey School of Business at the University of Western Ontario (BusinessWeek.com, 1/15/08), said in an e-mail. "It is important to put these events in historical perspective since many market participants have not been through similar events."

Peter Ricchiuti, founder and director of research for Burkenroad Reports at Tulane University's Freeman School of Business (BusinessWeek.com, 1/15/08), which does investment research on 40 small-cap companies in six southern states, said he and the students in the organization have been speaking to companies in a two-way conversation about the financial crisis. "They're telling us where their business is heading, and we explain what's going on with the rest of the world." Ricchiuti, who has followed the markets for 30 years, added: "One of things we're trying to do is take the sizzle out of the story and look at the fundamentals."

"The Meltdown Is on the Agenda"

Tom Snee, spokesman for the University of Iowa's Tippie College of Business (BusinessWeek.com, 3/10/08), said that the school's dean, Curt Hunter, is on the board of the Bank of Italy and is attending a board meeting in Rome. "I don't know specifically what the board is discussing, but one would think the meltdown is on the agenda and he is providing his advice." Additionally, Snee said, the school's Institute for Economic Research provides quarterly estimates of future state revenues used by the Iowa budget office, and its director, economics professor John Gewke, has been working with state officials to monitor "how the ongoing financial crisis might affect state spending."

The thirst for knowledge is worldwide. José Manuel Campa, professor of financial management at IESE Business School (BusinessWeek.com, 1/15/08)> in Barcelona, said that executive education programs and courses will be helping companies "synthesize and analyze the deeper and longer-term trends" of the financial crisis. "I was talking today to board members of a major utility company on how this is going to affect them."

Perhaps the most valuable insights are those that provide a clue as to what happens next. Robert Bruner, dean of the Darden School of Business at the University of Virginia (BusinessWeek.com, 1/15/08), co-authored a book on the causes and lessons of the Panic of 1907, described in the book's subtitle as "the market's perfect storm". The book was published in the summer of 2007, just as the real estate meltdown was gathering momentum. Bruner said there are lessons that can be learned from that century-ago crisis, which followed the failure of several businesses and brokerage firms. Financial panics share several common features—most follow a period of overoptimism and increasing financial complexity—that could be used to extrapolate the course of the current financial distress. For instance, he said, while all financial crises affect the financial system sharply, the after effects of a panic can last for several years.

Brain Trust

But can business schools actually step in and help? Probably not in the short term, says Bruner. "We are in the world but not of the world. We are not at the levers of executive action, and that's probably just as well. We will be able to judge and assess in real time and after the fact the adequacy of action."

On the other hand, Bruner says that the role of economist John Maynard Keynes in advising the British government on monetary and fiscal policy during the Great Depression can be illustrative of how academics can join in a "brain trust" to help generate ideas. "Academies are often sources of fresh thinking," he said. "I would not be surprised to see academics drawn into the discussion of where we go from here."

Maybe so, but there are limits to what business schools can offer policymakers from the outside, Frank Warnock, an associate professor at Darden and a senior fellow at the Federal Reserve Bank of Dallas' Globalization & Monetary Policy Institute, said in an e-mail. "Unless you are knee deep in a situation like this, you can only guess, and guesses cannot be helpful in times like these."

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