Crisis on Campus_ A Bold Plan for Reforming Our Colleges and Universities - Mark C. Taylor [30]
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Education Bubble
American colleges and universities, businesses that are vital to our national interests, are facing unprecedented financial difficulties. In order to sustain our leadership position in the world, radical changes must be made.
To begin to understand the full scope of the problems, we must evaluate factors that are relevant for any business: assets, costs, liabilities and income. The more one studies the economic plight of colleges and universities, the more disturbing the parallels with the recent failure of banks and other major financial institutions. While many factors within and beyond universities have contributed to this crisis, none has been more important than the transformation of the global financial system brought about by the networking of the world’s financial infrastructure. People who believe that the recent financial meltdown is nothing more than another cyclical disruption that eventually will correct itself do not understand what is going on. This crisis is not the result of a few rogue Wall Street bankers or mistaken models and misguided policies; it is systemic. The failure of the global financial system exposes the fragility of the new form of capitalism that has emerged in the past four decades and raises questions about its long-term viability.
On October 19, 1987, Black Monday, the Dow lost 22.6 percent of its value, or $500 billion. That seemed like an inconceivable amount of money at the time. At dinner that night, I had a conversation about the day’s events with my son, Aaron, who was fifteen at the time and now works in finance.
“Something really important happened today,” I said.
“Yeah, what?”
“In the twinkling of an eye, billions of dollars disappeared into thin air. Just like that!”
“Where’d they go?”
I was taken aback by the question and wasn’t sure how to answer.
“Well, I don’t exactly know. I guess the money wasn’t really there in the first place.”
“So, then, what’s the big deal?”
Aaron turned out to be right. Within a few months, the market was back to where it was before the crash.
In the years since the 1987 crash, bubble after bubble has burst, and financial assets have become more and more virtual, as opposed to money we can put our hands on at any given time. Who would have thought that our leading universities with what are supposed to be the best economics departments in the world would bet their future on what turned out to be an illusion, hypothetical money? And who could have imagined that some of the most influential advisors to private equity and hedge funds would be distinguished professors at the very institutions whose endowments plummeted as a result of their misguided theories? Supposedly sophisticated economists entranced by thinking about thinking developed algorithms, mathematical tools, to process equations that had little or nothing to do with the real economy but much to do with financial speculation. In previous forms of capitalism, people made money by trading things or selling their own labor; in finance capitalism, by contrast, wealth is generated by trading abstract financial instruments backed by nothing more than virtual assets. It is as if financial engineers created a reverse alchemical process that turned money into worthless paper.
Wall Street bankers and brokers were creating wealth out of thin air with numbers derived from other numbers. During the past two decades, the financial economy has exploded at a rate that defies the imagination. While it is difficult to establish the value of something based on nothing, reliable estimates indicate that in 2007 the total value of the real economy (goods