For the past half-century, the Chicago School has had a profound impact on the development and subsequent stagnation of academic finance. That is the subject of my lead article in The Journal of Structured Finance’s summer 2018, Did Academic Finance Play a Role in the Global Financial Crisis?
While economist Eugene Fama (Chicago) claimed the GFC was exactly how you would expect the market to work, jurist Richard Posner (Chicago) admitted that financial collapse came as a big shock to the profession. My article produced scholarly evidence that academic finance is immune to criticism because it is does not adapt to feedback or hold itself accountable to real-world economics. Hence it is not surprising that academic financial professionals were caught out when the GFC exploded.
A decade after the Crisis, may be the right time for a subject so influential in human capital as well as monetary terms to accept the necessity of change–for example, by taking securitization seriously as a research topic. In my paper, I contextualize it as a classic paradigm shift a la Thomas Kuhn. Securitization does not fit neatly within the framework of academic finance but in fact violates the key assumptions of finance and accounting. Intellectually it is more elegant than academic finance. It follows a parsimony of rules—most importantly, the fundamental laws of operations in mathematics in place since Legendre (1798)—to produce a kind of control theory for cash flow-oriented credit analysis.
This blog article is an abstract of the article Did Academic Finance Play a Role in the Global Financial Crisis?