The Risk of Regulation

A demanding course that focuses on free-market economies continues to attract students interested in careers in finance.

The students wait in silent alertness as professor Meir Kohn, who teaches Econ 26, “The Economics of Financial Intermediaries and Markets,” glances at the roster to pick one of them for questioning. Today’s class is about the regulation of financial institutions, where many of the students hope to find jobs after graduation. Kohn solicits responses to today’s reading assignments about the regulatory reaction to the accounting scandals of the early 2000s. Kohn’s gaze settles on a woman in the last row of the lecture hall.

“Chandler, can you tell us the purpose of the Sarbanes-Oxley Act?” he asks.

Chandler Salisbury ’13 takes a deep breath before she delivers the right answer: After the collapse of WorldCom and Enron, the act was passed to prevent fraudulent accounting. It promotes more transparent disclosure, increases accounting oversight and holds CEOs personally accountable for the accuracy of corporate financial reports.

“And is this likely to solve the problem?” asks Kohn.

When Salisbury points out that increased disclosure and accountability will increase costs for shareholders, Kohn interrupts her to restate his question: “Aside from the costs, does this actually prevent fraudulent accounting?”

In the time it takes Salisbury to compose her thoughts, another classmate raises her hand. “Even if there is more oversight you can still commit fraud if you really want to,” observes Isa Guardalabene ’13. This is a reply that resonates with Kohn. “Exactly,” he exclaims. “If you’re already committing fraud, it doesn’t matter if you commit more of it.”

For the remainder of the class Kohn grills the students—challenging them and pushing them to clarify and substantiate their answers. Kohn doesn’t believe in traditional lectures. He uses a Socratic question-and-answer method to push students to a deeper understanding. For each lesson students read a chapter in a 700-page textbook written by Kohn and prepare responses to a list of questions about the reading and related case studies. Twenty percent of the course grade is based on students’ responses to these questions in class.

Guardalabene, whose major is geography modified with economics, says this is the most challenging class she has taken. She claims to spend more time preparing a homework assignment for Econ 26 than she does preparing for final exams in her other classes. “And I’m not even taking it as a requirement,” she says, chuckling.

Guardalabene’s two study partners in the class—Salisbury, who recently transferred her major from government to economics, and Kate Burkhardt ’13, whose major is government and French modified with economics—join in the chuckle as they question their own sanity for having voluntarily subjected themselves to such a tough class. They recall the many students who dropped out during the first weeks of the term. But all three agree that though this is one of the most intensive courses they have taken, it is also one of the most rewarding. An additional incentive for sticking with the class is that each of them is interested in working in finance. Burkhardt remarks that mentioning the course during interviews “gets you a lot of brownie points” from alumni recruiters who themselves took Econ 26.

Kohn says that many former students tell him they wouldn’t have gotten through their interviews if the course hadn’t prepared them. “I exaggerate just a little bit when I say half of Wall Street has gone through some version of this course,” he says.

Before Kohn came to Dartmouth in 1978, Colin Campbell, a student of economist Milton Friedman, taught Econ 26 as “Money and Banking.” Campbell designed the course to counter the then-dominant Keynesian economic model—which advocates active government involvement in the economy—with a monetarist model that contends that government’s role in the economy should be limited to creating a stable money supply. Kohn continued his predecessor’s free-market approach but decided to focus more on financial institutions and less on monetary policy. Now in Econ 26 students learn about the nature and workings of securities markets and financial intermediaries such as banks, mutual funds and insurance companies. They also study the impact of regulation on the stability and efficiency of the financial system.

After more than a decade of teaching Econ 26, Kohn turned his lecture notes into a textbook, and then, realizing he didn’t have anything left to talk about in class, decided to stop lecturing and let the students respond to questions posed in homework assignments—and in class—to address material covered in his textbook

Now Kohn gives just one lecture at the end of the course to fill students in on developments since the last edition of his textbook, which was published in 2003. In this lecture about the recent financial crises, he describes the financial system as a cycle of interventions and adaptations. As government reacts to crises by enacting new regulations, investors adapt by trying to circumvent those regulations, which, in turn, skews the market to the possibility of new crises. In an unregulated market, Kohn says, natural selection ensures healthy stability, but government steerage of markets can create dangerous imbalances because regulators can’t foresee how their interventions distort the economy. “If you think of it in biological terms, it’s like relying on a monoculture,” says Kohn. “If one virus comes along, it can wipe out everything.”

The economy as an ecosystem is a recurring metaphor in Kohn’s explanations. And if the economy is an ecosystem, Kohn is a fervent Darwinian. The faculty advisor of the College Libertarians, Kohn is a strong proponent of deregulation and letting the fittest businesses survive. His study of economies has convinced him that governments are by nature corrupt and the market is self-regulating. “People aren’t honest because the police are watching them, but because it’s the way to make money,” he says.

Kohn doesn’t hide his Libertarian views from the students. “I tell them at the beginning of class that the answer to about 20 percent of my questions is ‘competition,’ ” he says.

Kohn would welcome a diversity of views, he says, but since most students in his class are interested in careers in finance and business, they tend to be as free-market minded as he is. He says that the more idealistic, anti-business students should be taking the course to gain a better understanding of what it is they oppose, but they tend not to. “I would be surprised if they feel they need to study the world to understand how it works. I think they probably believe they know how it works,” says Kohn.

Guardalabene says she initially disagreed with Kohn’s anti-regulation stance, but during the course of the term she found herself being persuaded.

“It’s hard to argue with the facts that he points out,” she says. But she also acknowledges that since she knew very little about the financial system when she came into the class, she isn’t in a position to offer an alternative view. “Maybe I will form different opinions when I have more experience,” she says.

Aaron Goone ’14, an economics major with a minor in mathematical finance who is preparing for an internship with Morgan Stanley Smith Barney, considers Econ 26 his favorite class because it has challenged and engaged him more than any other. “Knowing what you’re doing and why you are doing it is a huge part of being successful at your job,” he says. “I’ve learned a lot of that through this class.”

Goone, who shares Kohn’s economic ideology, says he would enjoy seeing his more left-leaning classmates challenge Kohn. He has noticed some who seemed uncomfortable with Kohn’s skeptical view of government, but they didn’t speak up in class.

“Occupy Dartmouth people tend not to take Econ 26,” he says.


Recommended Reading

For those interested in understanding the recent economic crises, professor Meir Kohn recommends the following:

Financial Institutions and Markets, by Meir Kohn, Oxford University Press (2003). “A little dated, but still a good introduction to how the financial system works.”

Engineering the Financial Crisis, by Jeffrey Friedman and Wladimir Kraus, University of Pennsylvania Press (2011). “A compelling explanation of how financial regulation (not deregulation) created the conditions for the crisis.”

The Big Short, by Michael Lewis, W.W. Norton & Co. (2010). “Not everyone was fooled. Lewis tells the story of several investors who saw the collapse coming and put their money on it.”

Reckless Endangerment, by Gretchen Morgenson and Joshua Rosner, Times Books (2011). “The star business columnist of The New York Times exposes the role of Washington corruption in setting up the crisis.”


Judith Hertog is a regular contributor to DAM. She lives in Norwich, Vermont.




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