Christine Lagarde, managing director and chairwoman of the International Monetary Fund since 2011, was recently nominated to be president of the European Central Bank, which sets policy for the 19 nations that use the euro. This is encouraging news. We desperately need stronger financial sector governance — and women like Lagarde have repeatedly demonstrated a mindset that looks better suited to exercise that responsibility.
In the wake of the 2008 economic collapse, back in 2010, I was sitting on a finance panel discussing the disappointing financial reforms proposed by the House of Representatives, when the moderator asked: If you had only one wish to heal the financial sector, what would it be?
“Only women should be allowed to regulate finance!” I answered then. “Brooksley Born, Sheila Bair, Janet Yellen and Elizabeth Warren. If they had been running financial regulation since 1990, we would not have had this crisis!"
Granted, I don’t know whether women could have exercised the power in our political economy to reign in the financial sector so effectively that they would have prevented a crisis. But I continue to believe that the perspective of these female leaders could greatly contribute to a sounder and more productive financial sector that would benefit society.
These women all expressed a vision that the financial sector is a part of the social structure that should be governed for the benefit of all society, rich and poor. They advocated for something more wholesome than design by, of and for the financial sector.
My answer on the panel was inspired by the words and deeds of these in key financial regulation roles: Born, former head of the Commodity Futures Trading Commission, which oversees futures and options markets; Bair at banking’s Federal Deposit Insurance Corp.; Yellen at the Federal Reserve; and Warren, then chairwoman of the Congressional Oversight Panel on the TARP legislation. Each made sensible recommendations to fix the financial system in a way that would protect the taxpayer and citizens from a recurring calamity that shattered many lives. These women both assured the broader public and proposed reforms to ensure this kind of crisis did not happen again.
Why did women appear to possess this superior ability?
For one thing, scientific studies have shown women have a greater prudence and sense of risk aversion. This evidence prompted LouAnn Lofton to write her book, “Warren Buffett Invests Like a Girl: And Why You Should, Too.” In the book, Lofton lays out how the man who built a legendary fortune through long-term investing exhibits emotional characteristics that are more like a woman’s, including remarkable prudence and patience. She argues this is key to Buffett’s stunning investment performance.
But women’s superior ability may have something to do with nurture as well as nature. Even in leadership roles, women are “outsider insiders,” as the Financial Times' editorial board chairman in the U.S., Gillian Tett, explained during a recent conversation. She has a doctorate in anthropology (and, full disclosure, is an INET board member) and cites studies that show women have long been conditioned to be outside observers within the male power structure.
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Even when “insiders,” they realize that their very presence in the establishment club could be unsettling to the male majority. They have learned to be artful in diagnosing the context in which they navigate, in order to fully exercise their influence and power.
At the same time, however, many women seem to be acutely aware that they must represent something broader and more inclusive than the elite clubhouse to which they’ve been admitted. They now also speak for others who have suffered from being ignored or neglected by the powerful.
Lagarde, the new European Central Bank president, referred to this outsider-insider attitude earlier in her career, when she was France’s finance minister. “I am not doing this for women,” Lagarde wrote in 2010, “but as a woman I am, perhaps, more keenly aware of the damage that the crisis has done through greed, pride and a lack of transparency.”
There are, of course, men, including Paul Volcker, Tom Hoenig and Michael Greenberger, who embodied a healthy vision of what real governance of finance should look like to meet the challenge of repairing the financial system. We could also, I am sure, find women who have been less than stellar in the financial regulatory realm. But it remains true that women repeatedly provided the most astute example of the financial leadership that is desperately needed.
Fears of ongoing corrupt and lax oversight of the financial sector that led to the 2008 crisis continue to haunt society. The disappointing resolution — with support going to Wall Street and the big banks, rather than the multitude of homeowners underwater on their mortgages — demoralized many Americans. The system appeared rigged.
Since Dodd-Frank, we can see the acceleration of dissatisfaction with governance. Control of both House and Senate, and ultimately the White House, shifted to the Republican Party, which has been vehemently anti-government.
Rather than the failure of the unfettered free market leading to a new era of financial regulation that would reassure Americans about the soundness of their economic system, we saw the eruption of a widespread cynicism. That despondency was not just confined to government and finance; it ultimately spread across a broad spectrum of government and to the larger loss of faith in the integrity of public service and expertise everywhere.
In 2015, in response to these concerns about government dysfunction and the need to hear more women’s voices who provided a healthy vision of financial regulation reform, the Institute for New Economic Thinking, the group I lead, held a conference in Washington featuring only women as speakers, including Yellen, Warren, Born and Lagarde. The meeting was designed to underscore that a positive vision of government was hiding in plain sight — strongly advocated by these women.
At one point, Lagarde was talking about the collapse of the legendary financial institution, Lehman Brothers, which ignited the climax of the 2008 financial crisis. She conveyed the empathy that women exhibit when she exclaimed: “What would have happened if Lehman Brothers had been Lehman Sisters?” She rocked the house with that lightning bolt of alternative vision.
Richard Vague, a seasoned, and successful, financier, writes in his new book, “A Brief History of Doom: 200 Years of Financial Crises,” that, without exception, first, financial crises emanate from the private sector; and second, they can be anticipated by monitoring readily available data.
Vague argues that leading financial regulators, including the central banks, do not follow this data and, most important, do not act proactively to prevent a financial bubble from forming. It is unsettling to read that, over and over throughout history, regulators had the capacity to diagnose when the financial sector gets off course and the ability to prevent financial crises — but didn’t act. Modern financial economies seem unable to construct a form of governance that can channel the financial sector in a direction that serves society and avoids the deep economic costs incurred when a financial crisis erupts.
One solution, Vague stated succinctly during a recent discussion, would be to have “adults in the room” managing the financial sector. And, if those adults embodied the mindset of these stellar women, including Lagarde, our financial future might finally become worthy of confidence — and our society might begin to heal very deep wounds.