Professor Erik Gerding's interest in financial bubbles began in the late 1990s, when it seemed like the stock market could only go skyward, led by the giddy high-tech sector, which also seemed to know no bounds.
After helping clients through the inevitable aftermath as a transactional lawyer with Cleary, Gottlieb, Steen & Hamilton, he turned his thoughts to the boom-bust cycle of stock market bubbles and what causes them.
He began analyzing financial bubbles in 2003 and his first article was published in 2006, the year he joined the UNM law faculty. That article, "The Next Epidemic: Bubbles and the Growth of Decay of Securities Regulation," appeared in the Connecticut Law Review. His second article appeared a year later in the Wisconsin Law Review. It was titled, "Laws Against Bubbles: An Experimental Asset Market Approach to Analyzing Financial Regulation."
As a result of his scholarship, Gerding was not surprised when the housing bubble burst, bringing down the entire United States financial system with it last year.
"It's fascinating to look at financial markets and economics with a view of what happens when people systematically fail to consider major risks," he says. "Our challenge now is to come up with regulations that effectively address systemic risk and can survive political cycles."
A big challenge it is, considering the power of "disaster myopia", which, he says, settles in after many years of increased profits and booming markets. Along with the good times comes a false sense of security, which can precipitate poor judgment and the casting off of regulations.
Gerding is looking at all of this in his new book, scheduled for publication in late 2010 or early 2011, from Routledge Press. The working title is, Bubbles, Financial Regulation and Law.
Meanwhile, he continues to write articles on the subject, his most recent appearing this year in the Washington Law Review. It is titled, "Code, Crash, and Open Source: The Outsourcing of Financial Regulation to Risk Models and the Global Financial Crisis."
His work has been mentioned in Money and Computerworld magazines and he has kept up a busy schedule of speaking engagements. He will be the featured speaker at noon Sept. 1 at the Albuquerque Bar Association's regular monthly meeting at the Embassy Suites Albuquerque, where he will speak on "Grading the Obama Administration's Financial Reform Proposals."
"We can understand in very general terms what needs to be done, but if Congress doesn't follow through with the details, the jury is out as to how the Obama Administration's blueprint will translate into effective regulations," says Gerding.
He also takes the financial crisis into the classroom, viewing it as a rare teaching opportunity. "This is a chance for students to think through all the consequences of policy proposals and to use economic analysis to move beyond the tendency of many lawyers to make policy arguments without any evidence or analysis."
"The more informed students are about the crisis, financial products and markets, risk and economics, the better prepared they will be to serve their clients and communities after law school, whether they practice on Wall Street or in New Mexico," he says.