by Harsimarbir Singh, Duke University

Multibillionaire former CEO of Microsoft Bill Gates once said that “The company that made the Microsoft Excel had to hire an MBA to manage its own balance sheets.” With this statement, Gates seems to acknowledge the importance of people who understand finance.

This article builds on this remark and extends it to a somewhat different school of thought. Many of you might have seen Suze Orman’s show where she gives her viewers suggestions on how they should manage their finances. Just one episode can make you realize how many people truly understand how they should manage their expenses.

The financial blood bath that engulfed the world between late 2007 and early 2009 can be attributed to the way bankers think and act. But the fact is that while these people help churn out billions of dollars and make everyone rich and powerful in times of economic boom, their basic level of judgment and intelligence can sometimes be questionable. As a Masters in Engineering Management Student at Duke University, I am taking a course taught by Professor Douglas Breeden , who is a very successful and well known banker. On the first day of the class, he acknowledged the mistakes that the banking community has made. The fact is bankers are human and are liable to err. Subsequent discussions in the class have led me to write this article. My thoughts are influenced by his lectures and the interactions I have had with him. I thank him for sharing his insightful views which inspired me to write this piece.

There are two very important ideas I want to convey. First we shouldn’t place the blame for the crisis solely on the bankers. True, they should have seen this coming. But it is worth noting that in good times they were forced by governmental policies to make loans, such as the subprime and Alt A loans, that later led to the financial tsunami of last year. Take for example the CRA , the Community Reinvestment Act, enacted in 1977 to prevent redlining (discriminatory credit practices against low-income sections) and to encourage banks and thrifts to help meet the credit needs of all the segments of their community including low and moderate income neighborhoods. Essentially the government supported loans to people with poor credit histories. Thus a lot of the “bad loans” might have come through this provision. True, the Government has done fantastic job in preventing some financial disasters, but its attempts to save the economy could be causing us to head back towards making the same mistakes we made earlier. Banks were saved by government by Troubled Asset Relief Program (TARP), Cash for Clunkers , and other programs and now they are essentially indebted to the government. And the government is telling them to lend to people again to lift them out of recession. While it is likely that the bankers will be a lot more careful, they are human and may still loan tax payers’ money to uniformed borrowers with poor financial planning.

The financial crisis seems to be caused by “Animal Spirits,” a phrase coined by John Maynard Keynes, where consumers are so buoyed by the enthusiasm that they borrow and spend money that they can never repay. And the bankers affected by the same spirit lend money to these people without considering their abilities to repay the loan. This theory was later referenced by the former Chairman of Federal Reserve, Alan Greespan, regarding the irrational exuberance among the investors and bankers during 1996- 1997 and the possibility of a fall from such exicitement. He was proven correct when the technology bubble burst. Mr.Robert J Shiller , the famous Yale economist has written the entire best selling edition on this topic which proves its relevance.

Where does all this lead to? There are about 90- 95 % of bankers who are genuine and work honestly. The other 5-10 % seem driven only by the commissions they earn on the volumes of their sales. Thus, we as borrowers have a responsibility to brace ourselves for both dishonest self-serving bankers, as well as honest bankers who can make honest mistakes. We have to be sure that we can manage what we are getting into. But are we really informed enough to take on this responsibility? Many of them believe they are because they hear from their neighbor, their carpool, or the people on CNN that they have been properly prepared. We as students also have to be careful of the options being presented to us. For example credit card issuers often give students a credit limit that is much higher than they can repay .We have to be sure that we can manage our money properly. But here is the major concern. Are the students who enter the job market with college degrees and high paying jobs prepared enough to manage their income? Are they well equipped with the tools necessary for proper financial management? Consider this—according to National Center for Education statistics (nces.ed.gov) , of the 1,524,000 students who graduated in 2006 – 07 school year, 1,196,000 were from non-business fields. And among the masters students 177,000 came from a non-business background. Furthermore the center doesn’t even provide statistics for PhD’s as it wasn’t substantial. This tells us two things. One, a large proportion of students graduating from college might not be have basic financial knowledge. These students would eventually have to plan their investments, insurances, mortgages, funds, etc. Two, as we progress from masters to PhD’s the number of people in the field of finance decreases. So even when well-qualified students with business degrees become professionals, they might not be equipped with the best skills of handling their newfound income resources.

Another major issue is the rapid loss of personnel in the financial sector. According to Computer Science Research Association, after the technology bubble burst in 2000-01, there was 16% drop in the students preparing for IT fields. The number picked up 8 years later in 2008 when there was an increase by 6.2%, which might have been due to the financial meltdown. This might also happen to the field of finance, which is becoming less attractive to many students due to lack of jobs. It may take about 6-8 years for interest in finance to pick up again. Although Professor Breeden suggests that we need to practice “Financial Conservatism” in offering jobs to the new graduating students, current flow of people out of the finance fields might be more detrimental than beneficial. And if more and more people decide to prepare for a field other than finance or business, there will be more students going into professional life with little or no financial tools to manage their life.

To prevent more students from entering the work force with little or no financial knowledge, I recommend that a very basic level of financial education should be mandatory for students in all fields so that at least they understand what their financial planner is doing with their money. Better yet, they might learn to manage money themselves. Also government should be taking steps to ensure that we don’t end up in the same financial mess again by addressing long term issues and not focus only short term problems. But ultimately, we as students should be prepared to go into the world with an understanding of what is good for us and what might not be the best way to go.