Professor of Economics George Norman last evening warned that the recent bank collapses could occur again due to persisting structural problems in the financial industry.
Norman in his lecture cautioned against thinking that the crisis would not repeat itself.
"You have a simple model that tells you how things should be," he said. "Yet we have a situation where the world repeats itself. It's going to happen again. We see some elements of that already."
Norman spoke in Brown and Brew at the Tufts Community Union (TCU) Senate−sponsored After Hours, an informal conversation series featuring lectures and question−and−answer sessions aimed at promoting intellectual life on campus.
Last evening's event was titled "Are Corporate Scandals Inevitable," and Norman spent the lecture portion of the event explaining the problems within the financial industry. He covered topics ranging from the massive trading losses at Barings Bank and the Bernard Madoff scandal to the more macro issue of the contradictory structure of corporate banks and the U.S. Securities and Exchange Commission (SEC).
Norman explained that there is a huge conflict of interest that exists between those analyzing financial markets and the banks doing the trading.
The problem, Norman said, is that financial analysts are paid on an incentive−based structure and beyond that are paid bonuses based on the amount of business they attract for a particular bank.
This means that if they do not project high business levels for a particular bank, they will not receive large bonuses.
"The outward analyses say ‘buy, buy, buy,' but the internal e−mails say that they're wrong," Norman said. "That's like me being paid for the grades that I give you. If that was the case, I'd give all of you A−pluses. That's the conflict of interest."
The second half of the event was a question−and−answer session, which elicited many questions from audience members.
Among the questions asked was why Madoff was able to get away with his illegal financial dealings for so long. Responding to the question, Norman said that the Madoff scandal was illustrative of the larger problem that still exists in the financial industry.
"The problem was that, aside from the fact that the SEC investigators were most certainly incompetent, most guys that start working at the SEC go from being gate−keepers to being poachers," he said. "You don't want to push too hard, because you might want a job with Madoff some day."
Junior Liam Clegg felt the conversation was extremely helpful in enhancing his understanding of the subprime mortgage crisis and larger banking issues.
"He makes an incredibly complex story understandable without oversimplifying it, and I think he gave us all something to think about," Clegg said.
TCU Senator Yulia Korovikov, a freshman, agreed that the discussion was very accessible to all members of the audience.
"I thought it was a really interesting talk, even for someone [who's] not an economics major," she said.
Sophomore Brian O'Reilly welcomed the fact that Norman went beyond providing an excellent explanation of the inherent problems in incentive structures, offering some solutions as well.
"I think he offered some really good ideas on how to minimize their impact and regularity," O'Reilly said.
