Scott Nelson is Legum Professor of History at the College of William and Mary. He is an award-winning writer, lecturer, and student of economic and social history. In 2008, National Geographic published Nelson’s Young Adult book about historical research (co-authored with Marc Aronson), entitled Ain’t Nothin’ But a Man. It received a full-page review in the New York Times, won 7 national prizes, and was named a best book of 2008 by Publishers Weekly among others. His current book, Crash: An Uncommon History of America’s Financial Disasters, will be published by Knopf in 2011 or 2012.
Todd: You have recently completed a book called Crash, looking through history at economic crises. What can we learn from the past?
Scott: Well, crashes are more than financial downturns. They demonstrate a general sense of uncertainty about institutions, what I call semiotic doubt. Is this dollar worth what I think it is? Is this debt going to be paid? It’s a deep problem with objects that represent wealth as well as fears or concerns about the institutions that create them: banks, mutual funds, or states.
Todd: In what way is the current crisis different than the rest?
Scott: Well, it’s very different from 1929 but more like 1837 or 1819. In those crises banks were at the center of the controversy – there was a general sense that banks were not pillars of the nation but (in the words of one Senator from 1819) caterpillars. That is, institutions that ate up everything in front of them. Bank-centered panics tend to be much more about liquidity, and tend to draw much more concern about the future of banking as an institution. Now there is lots more rage at banks, too. There was a little of that in 1929, but not as severe as in this crisis.
Todd: You have written that transparency is often an outgrowth of a crisis. How has this happened in the past?
Scott: In the 1857 panic, Elizur Wright pushed most for transparency, and he’s really responsible for much of the transparency we see in business now. He was a socialist, abolitionist and an actuary (no lie) and he was one of the first to apply mathematical analysis to business firms. He coined the term “return on investment” in the US. He was angry about how opaque big insurance companies were and pushed Massachusetts to regulate them – effectively to list all their investments and make their books public. The companies resisted it, but he won his battle in the depths of the 1857 panic. In later panics his accounting requirements became generally demanded of all publicly-traded firms.
Todd: Transparency seems to be a buzzword, but it is often not clarified, “What are we being transparent about? And to whom?” What is called for now?
Scott: Openness of books, transparency, clarity aren’t just things that are nice to have – they can make or break any institution that relies on trust to function. That includes banks but also NGO’s, funds, etc. Much of the internal workings of banks for example had been invisible to most folks. The so-called “stress test” that the federal government used on the banks in 2009 exposed some of the problems with bank operations. It turned out that many banks had much higher reserve ratios than they claimed. Likewise many of the big banks were forced to take off-the-books vehicles back into their firms for accounting purposes. In banks, anyways, that transparency can remove that semiotic doubt.
Todd: Are oversight and legislation sufficient to address the system’s failures?
Scott: No, the institutions really have to change from within. Legislation can push an institution to make certain numbers visible, but we all know that books can be cooked. In Countrywide, for example, there were regulators, risk managers, and accountants who were supposed to prevent the firm from taking and reselling the “liar loans”. But the structure of that firm was such that the folks who were supposed to regulate were the last to find out about an operation. They had to sign off or be sidelined. Likewise the biggest banks like Bear Stearns and others found ways to pressure the “regulators” like the bond-rating agencies. That’s generally why open books are better than what firms call transparency and transparency is better than legislation-mandated rating organizations.
Todd: What do you see as the new context in which institutions or organizations can thrive?
Scott: Well, part of this might be restructuring from the ground up: making internal review of procedures an integral part of the operation of a firm. Any institution can be stress-tested. The time to do that is now, when times are tough. One thing about the 1929 troubles . . . There was a stock market crash in 1929, but the depression arguably came in 1931 when banks carrying lots of foreign debt proved unable to survive once German borrowing institutions failed to pay their debts. Many of our banks are still sitting on toxic assets that they haven’t marked-to-market yet. This may be a prologue. Stress-testing is essential.
Todd: What role can the people and organizations who are not associated with the financial system play in the revamping of the system?
Scott: For years many of the big corporate institutions that I know about modeled themselves on banks. The CFO really ran the place – he or she made all the important decisions. Now we see the problem with that environment. Other organizations need to make themselves into models of the next banking institution we will have. What will that new organization look like? It’ll likely be more open, more flexible, and thus more fundamentally trustable than the institutions we have now. If they aren’t, then we’ve gotten nowhere.