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BY SOREN LARSON

In print | Published August 27, 2009 — Updated September 09, 2009 21:19

When President Obama returns from his family vacation in Martha’s Vineyard on Aug. 30, he will face a number of tough policy challenges, including financial regulatory reform. And so as both Obama and Swarthmore students return to work, it seems it is only Swarthmore’ job —nay, it is Swarthmore’s God/Allah/Yahweh/Bhagwan/Obama/Waheguru-given obligation — to consider regulatory reform at both the national level and within the College. Put differently, we must ask ourselves the paramount question: Are freshmen Too Big To Fail?

Before we start to squirm thinking about the new group of students on whom the admissions office bet more than a quarter of the college’s future welfare, we should define TBTF.

Scholars have spent much time thinking about ways of identifying systemically important firms and dealing with them before they pose a systemic threat.

This month, James B. Thomson of the Federal Reserve Bank of Cleveland released a policy discussion paper on defining TBTF and mitigating risks posed by systemically important institutions. Thomson explains that systemically important financial institutions are those that are (1) very large; (2) very interconnected; (3) part of a collection of many firms exposed to the same risk (the ‘too many to fail’ problem, which implicates herding behavior); (4) large relative to the contestability of the market (whether a new firm can easily assume the activities of a distressed firm); and (5) subject to various “macro-financial conditions” that would affect the points at which these criteria become problematic. Thomson’s five criteria, unfortunately, show us that the Class of 2013 is definitely TBTF.

First, the freshmen class comprises more than twenty five percent of the student body — it’s big.

Second, first-years are interconnected. Most freshmen make friends and work with other freshmen, so the collapse of even a couple of freshmen can threaten the well-being of the entire freshmen class. Their welfare also implicates upperclassmen, though to a lesser extent.

Third, Swarthmore attracts a particular kind of student with similar general interests. Without a doubt, the new cohort of Swatties will have similar risk exposures, meaning that they’re also TMTF!

Fourth, froshlings make the operation of existing campus organizations possible through their zealous participation (a trait less prevalent among upperclassmen) and bring unique goods and services to the community. If a freshman were to fail, an upperclassman would be either unwilling or unable to pick up the slack. (Now where’s Christine Varney when you need her?)

And finally, Swarthmore is a dynamic place capable of creating environments that lower the thresholds at which we should become alarmed about a freshman failure leading to a systemic breakdown.

In the financial sector, Thomson proposes a levy of “graduated sets of regulatory taxes, which are designed to internalize the externalities” of being systemically important. These taxes would hopefully offset the benefits (e.g. lower perceived risk despite risky behavior; lower capital costs) of such designation as well.

If freshmen are systemically important, the college will need to apply regulations commensurate with the size, riskiness, herding and complexity of the freshmen class. These regulations should reduce dissolute, risky behavior and the prevalence of the conditions defined in Thomson’s criteria. While taxes on risky behavior are easier to design and enforce, it’s more interesting to think about directly regulating behavior.

The first step is to rein in risk. We can regulate freshmen sleeping hours to ensure proper rest, limit class selection based on high school experience and performance to optimize academic performance, and curtail the potential for disruptive breakups by limiting acceptable student proximity to members of their preferred gender.

The college can swiftly address Thomson’s first three criteria, at least partially, by merely accepting fewer students into the incoming class. However, if that were unacceptable, it could slowly integrate members of the freshmen class into the campus community.
This would decrease freshmen interconnectedness and their propensity for herding.

Although there’s little to be done about Thomson’s fourth criteria, the college could mitigate campus dynamism by limiting discussions of heteronormativity to once every two weeks, leveling the Crum to make way for a Brooks Brothers superstore, scrapping pasta bar and inviting more Haverford students to Swarthmore parties.

The entire Swarthmore community would benefit from these regulations. With less risk and more of Richard Thaler’s ‘libertarian paternalism,’ these proposals would help new students make smart decisions they just can’t make without comprehending far-too-arcane risk. These sure-to-be Martin Warner-approved regulations would ‘nudge’ students to correctly decide to avoid classes with requirements they couldn’t handle and avoid members of the preferred gender who they, well, couldn’t handle either. And when we limit campus liveliness, the potential for problems in Thomson’s first four criteria is considerably reduced.

Mind you, these pseudo-serious proposals for Swarthmore aren’t so different from those in Obama’s white paper and HR-3126, the Consumer Financial Protection Agency Act of 2009, sponsored by none other than House Financial Services Committee Chairman Barney Frank, D-Mass. The two documents make it clear that House Democrats and the Obama administration fear the “creative destruction” free-markets represent.

Instead, Democrats advocate elitist consumer protections that will prohibit Americans from purchasing financial products based on government’s assessment of consumer sophistication. (And while we’re looking for Ms. Varney, can someone get Chuck Schumer on the line?)

Similarly, these Obama-esque regulations suggested for Swarthmore freshmen are paternalistic, may reduce students’ ability to learn from their mistakes and encourage high-risk regulatory evasion, like sneaking out of the dorm at night to engage in academically taxing behavior, or taking difficult classes outside of the administrations’ regulatory umbrella, like those at the University of Pennsylvania, for instance (oh, wait … ).

These behaviors outside the regulatory scope would be even harder to monitor and pose even greater threats to our system.
So, what should we do about the systemically important freshmen class? Nearly nothing.

Now don’t get cocky – the pass/fail semester is no bailout. Freshmen who don’t use their first semester wisely to become acclimated to their new academic and social environments will be at a disadvantage relative to their enterprising peers.

However, if the class of 2013 uses its peer and faculty advisors to help guide them in deciding how to most productively invest their time and energy, then the 2009-2010 academic year will be a profitable year, indeed.

Soren is a junior. You can reach him at slarson1@swarthmore.edu.

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