Universities, especially tenured professors, sometimes neglect their vital social role as intellectual vigilantes.

Sir, I refer to Tim Harford's discussion of "Are universities worth it?" August 27.

I totally agree with Harford that universities generally produce a lot of local and global good vital for the welfare of society, though it behooves us never to ignore the possibility they could also generate some awful local and global bad.

But something Harford leaves out in his discussions, is that universities, most specially tenured professors, as intellectual vigilantes, have an important societal role to fulfill of alerting to stupid and dangerous ideas, like that of the credit risk weighted capital requirements for banks.

What are the causes of major bank crises?

1. Unexpected events, like major devaluations and natural disasters.

2. What was ex ante perceived as very safe turned out ex post to be very risky.

3. Shenanigans like unauthorized speculative trading or banks lending to their own directors or shareholders.

What did the regulators do?

They introduced credit-risk-weighted capital requirements: more ex ante perceived risk more capital - less risk less capital... re-clearing for basically the only risk that was already being cleared for, by means of size of exposure and interest rates.

For instance, they gave prime AAA to AA rated assets a 20% risk weight, while highly speculative almost broke below BB- rated, assets got a 150% risk weight...

As if banks would ever build up dangerous excessive exposures to what is below BB- rated.

And that has seriously distorted the allocation of bank credit to the real economy with disastrous consequences.

But have we heard sufficient finance professors protesting sufficiently against this the pillar of current bank regulations? Absolutely not! In fact their deafening silence on it, is one of the principal reasons why this issue is not even discussed.

Sir, it would be great if the undercover economist Harford would dare to do some research on the why of that silence. He could do that in his beloved Oxford or, if he feels more comfortable doing so, in some university of some other faraway town. (Cambridge?)

PS. Here is a more detailed aide memoire on the Basel Committee for Banking Supervision’s regulatory monstrosity.

PS. There are some academics who have protested these regulations but mostly in terms of the capital requirements being too low or in terms of the distortions these might cause of the balance sheets of banks. They are correct but my point is that the distortions produced in the allocation of bank credit by using different capital requirements, is even more important than these being too high or too low.

@PerKurowski ©

Is not graduation time a bit late to inform students: “There is more to university than money”?

Sir, Nancy Rothwell, the president and vice-chancellor of the University of Manchester, writes: “Each year I tell graduating students that if they leave university with only a degree and greater “earning power”, I consider we have failed them. A university experience should be about so much more than this.” “There is more to university than money” April 16.

Absolutely! But is not graduating time a bit late to disclose that? How much debt would students dare to take on in order to pay the tuition fees, if the request of admission papers contained a: “Warning, universities are more than about making money”.

By the way, has there recently been some academic research on the evolution of the remuneration of professors? These Piketty days, it would be interesting to see how that has evolved.

In 2007 I argued that higher education should be more of a joint venture between professors and students. Of course I did not mean all the professors’ salaries were to be based on the earning powers of students. As I said, I fully agree that universities are much more than that, but, some better alignment of incentives, seems to be much called for.

It would seem that just like easy house financing translates into higher house prices, easier education financing just translates into higher tuition fees. But, I may be wrong, so as I said research is needed… any papers coming up on this?

PS. Someone commented. "There must be a little sadism involved here, since graduation time is precisely when students most begin to think of money."

@PerKurowski ©

You in FT have more voice than most professors teaching finance, so who’s really more “responsible for teaching responsibility”?

Sir, I refer to John Authers’ “Who is responsible of teaching responsibility” June 23, FT’s special “Business Education: Financial Training”

There Authers writes “And yet biggest business schools find it hard to prepare their students to joust with regulations. One problem is practical: these days, the top schools are global, but regulation is country specific” Hey where has Auther’s been? Does he not know that on June 26, 2004, 10 years ago, the G10 signed up on Basel II which established that truly nutty concept of risk-weighted capital requirements?

Had these business schools, and FT journalists, been a little more responsible for what they were doing, they would most certainly informed the regulators in their ivory towers, that this was going to distort the allocation of bank credit in the real economy, with tragically consequences.

And Authers also refers to “the pre-crisis power of credit rating agencies. The Basel II bank regulations gave investors a big incentive to buy anything stamped triple A by agencies. That way lay disaster.” Come on Authers. How many borrowers are not any longer contracting credit ratings because of Basel III? And how did Basel III really change something? By banks being forced to take a tougher stance if they believe credit ratings were wrong? Whoa!

And then Authers writes that “ratings were only ever advertised as opinions on publicly available information”. Where does he get that from? The truth is that credit rating agencies quite often have access to much more information the public and bankers have.

And if we are to talk about ethics, let us be clear that it is highly unethical of regulators to discriminate against “the risky”, those already discriminated against precisely because they are perceived as risky, as unethical it is for financial journalists to shut up about that discrimination… and so John Authers and colleagues might be more in need of courses in ethics than students in business schools… though that admittedly leaves us with the problem of finding out who are going to teach you those ethics. Me?

Will now tenured university professors retire on senior retirement campuses?

Sir, in 2004 I published in Venezuela an Op-Ed titled “Real or virtual universities” and in which I discussed imaginary ongoing heated budget debates in the universities, between those who wanted better classrooms and those who wanted better servers. 

When now reading Gillian Tett’s “Welcome to the virtual university and budget learning” February 2, I get the feeling that soon many university campuses might retire by being acquired by chains specializing in retirement homes for the baby boomers, and where perhaps many retiring professors can remain feeling at home. 

Really, if the incentives of the physical universities are not better aligned with the future income realities of their student, their current business model is bound to break. Perhaps the professors’ retirement plans should be based on a percentage of the future earnings of the graduates, at least so as to decrease the risk they will be sued by their former students for failing to deliver what was implicitly promised them.