Accounting Antecedents of the Financial Crisis Shyam Sunder, Yale University Prudence vs. Liquidity: Alternative Approaches to Money, Finance and Accounting.

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Presentation transcript:

Accounting Antecedents of the Financial Crisis Shyam Sunder, Yale University Prudence vs. Liquidity: Alternative Approaches to Money, Finance and Accounting Workshop at Bocconi University, Milan March 1, /18/20131Sunder: Financial Regulation & Engineering

Accounting Antecedents of the Financial Crisis Growth of, and dependence on written standards of financial reporting since 1930s 1/18/2013Sunder: Financial Regulation & Engineering2

Accounting Antecedents of the Financial Crisis Susceptibility to mathematical financial engineering 1/18/2013Sunder: Financial Regulation & Engineering3

Accounting Antecedents of the Financial Crisis Dispersion of outcomes as new definition of risk 1/18/2013Sunder: Financial Regulation & Engineering4

Accounting Antecedents of the Financial Crisis Accountants abandon prudence 1/18/2013Sunder: Financial Regulation & Engineering5

Accounting Antecedents of the Financial Crisis Accountants worship at the alter of liquidity The so-called “Fair Values” (rhetorical trick) – procyclicity, – accounting from markets instead of for markets) 1/18/2013Sunder: Financial Regulation & Engineering6

Accounting Antecedents of the Financial Crisis Management of market liquidity by issuers of derivative securities; off-spring of written accounting standards 1/18/2013Sunder: Financial Regulation & Engineering7

Accounting Antecedents of the Financial Crisis Little done to date to deal with these challenges to stop the current crisis or to prevent them in the future 1/18/2013Sunder: Financial Regulation & Engineering8

Accounting Antecedents of the Financial Crisis What can be done: social norms, Strict specification of limits on what banks with access to public money can do Good accounting and finance is boring and low-paid – Like plumbing or electrical wiring, not exciting like fighting a fire or skiing 1/18/2013Sunder: Financial Regulation & Engineering9

For example Figure 1: Relative Wage and Education in the Financial Industry Thomas Philippon, Ariell Reshef, “Wages and Human Capitalin the U.S. Financial Industry: ,” New York University and University of Virginia Working Paper, /18/2013Sunder: Financial Regulation & Engineering10

1/18/2013Sunder: Financial Regulation & Engineering11

Thank You. 1/18/201312Sunder: Financial Regulation & Engineering