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I was equally surprised to see that my basic theme—the need to democratize finance by making the financial markets work better for all people—was not seen as more sympathetic to their concerns. In fact, this theme would appear to promote the deepest objectives of Occupy Wall Street. While it is impossible to overlook illegality as one cause of the current financial breakdown, I believe that in situating the problem there we fail to appreciate the big picture.

We have a financial system that malfunctioned because of a host of factors. If we do not address the deeper sources of these problems by improving the system, we will have missed the point of the problem—and the opportunity to correct it. Certainly anyone who committed fraud should suffer penalties. But it is hard to blame the crisis on a sudden outbreak of malevolence. The situation during the boom that created the crisis was rather more like that on a highway where most cars are going a just a little too much over the speed limit.

In that situation, well-meaning drivers will just flow with the traffic. The U. And, pursuing this highway metaphor a bit further, we may suggest that automotive designers would best stay focused on how new technology can help us better manage vehicular traffic, with improved cruise control, external electronic feedback to cars, and ultimately even self-driving cars—complex new systems that will enable people to reach their travel destinations more easily and more safely. All of these protest movements are only the most manifest signs of discontent that have been discernible in conversations and blogs ever since the financial crisis began.

The words of street protesters and angry businesspeople alike are without focus and offer us no clarity about what is wrong or what should be done. And yet the underlying dissatisfaction with our financial system, in the wake of the financial crisis, reflects real problems with the system that need to be fixed—problems that have not yet been solved by the new legislation and regulations put forward in the wake of the crisis.

The financial crisis became visible in the United States when home prices started to fall after By this decline had brought prices of home mortgage securities down far enough to create a crisis for investors in these securities. It was called the subprime crisis because the price falls were especially striking among mortgages issued to subprime borrowers, that is, home buyers who are judged more likely to default because of factors including their past payment and employment histories.

Financial innovations related to these sub-prime loans were blamed for the crisis. But the crisis did not remain confined to subprime mortgages; that was only the initial shock in a vast catastrophe. The consequence was a drop in real estate prices and the collapse of financial institutions, not only in the United States but also in Europe and elsewhere. By the spring of the crisis was so severe that it was described as the biggest financial calamity since the Great Depression of the s—bigger than the Asian financial crisis of the s and bigger than the oil-price-induced crises of —75 and — This crisis continues to have repercussions around the world.

Imperfect as our financial system is, I still find myself admiring it for what it does, and imagining how much more impressive it can be in the future. I realize that critics might think that preparing students for careers in finance merely exacerbates a trend toward greater economic travail for the many. Certainly some who work in finance or related fields often reap great material rewards for their efforts, while others earn far less.

The government bailouts of well-to-do bankers have redoubled public concerns about inequality. But finance should not be viewed as inherently or exclusively elitist or as an engine of economic injustice. Finance, despite its flaws and excesses, is a force that potentially can help us create a better, more prosperous, and more equitable society.

In fact, finance has been central to the rise of prosperous market economies in the modern age—indeed this rise would be unimaginable without it. Beyond headlines incriminating bankers and financiers as self-aggrandizing perpetrators of economic dislocation and suffering, finance remains an essential social institution, necessary for managing the risks that enable society to transform creative impulses into vital products and services, from improved surgical protocols to advanced manufacturing technologies to sophisticated scientific research enterprises to entire public welfare systems.

The connections between financial institutions and individual people are fundamental for society. Clarifying the terms of these connections and establishing a proper context for implementing and enhancing them is the subject of this book. It seems a paradox that the very financial system that is the facilitator of some of our greatest achievements can also implode and create such a disaster.

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Yet the best way for society to proceed is not to restrain financial innovation but instead to release it. Such an approach can reduce the impact of such disasters and at the same time democratize finance. At various points in this book I describe financial innovations currently being developed, and I also propose newer innovations, as examples of how creative and well-meaning people can still further improve our society and democratize its finance.

And the best way to do this is to build good moral behavior into the culture of Wall Street through the creation and observance of best practices in its various professions—CEOs, traders, accountants, investment bankers, lawyers, philanthropists.


Reflections on Finance and the Good Society

When Adam Smith wrote his classic Wealth of Nations in , a book long acclaimed as marking the beginning of modern economics, the pressing issue for thinkers and critics of the day was tariffs. But Adam Smith and other economists who followed him were successful in clarifying the importance of trade for the widespread wealth of nations.

Since Adam Smith, lobbyists for special interests have found it much harder to push up tariffs, and trade is substantially free today—a vital institution in creating the remarkable growth and widespread prosperity we have seen since the revolutions of the eighteenth century.

At this time of severe financial crisis the point of contention among thinkers and critics is not trade but finance itself. This hostility is reminiscent of the public state of mind during the last major world financial crisis—the Great Depression after —which led ultimately to a degree of unrest that shut down much of the world economy and contributed to the tensions that led to World War II. Hostility among the general public generated by the crisis may have the unfortunate effect of inhibiting financial progress. Ironically, better financial instruments, not less activity in finance, is what we need to reduce the probability of financial crises in the future.

There is a high level of public anger about the perceived unfairness of the amounts of money people in finance have been earning, and this anger inhibits innovation: anything new is viewed with suspicion.

Reflections on Finance and the Good Society

The political climate may well stifle innovation and prevent financial capitalism from progressing in ways that could benefit all citizens. To be sure, financial innovation is still percolating, at a slow and conservative level, but major new financial inventions cannot be launched now because of fear. In this book I contend that the financial crisis was not due simply to the greed or dishonesty of players in the world of finance; it was ultimately due to fundamental structural shortcomings in our financial institutions.

Yet such shortcomings as a failure to manage real estate risk or a failure to regulate leverage are still not really being addressed; the response to the crisis has not been to innovate confidently to address areas where our institutions failed. Instead, the main focus has been on avoiding bailouts and reducing national debt by curtailing government spending. Initiatives developed by politicians in response to public anger have been shaped by what the public perceives as the problem, not by the contributions of visionaries.

Socially productive financial innovations could be moving forward rapidly, given the information revolution and with so many more countries experimenting with different economic structures and competing in the world marketplace. In coming decades we could see rapid development in the breadth of financial contracts, with extensions in the scope of markets, for the purpose of safeguarding our fundamental economic assets. Innovations could include the implementation of new and better safeguards against economic depression, including the proliferation of new kinds of insurance contracts to allow people to be more adventuresome in their lives without fear of economic catastrophe.

We could also see innovative measures developed to curtail the rising plague of economic inequality that threatens to create serious social problems in our society. What I want most for my students—near and far, young and old—to know is that finance truly has the potential to offer hope for a more fair and just world, and that their energy and intelligence are needed to help serve this goal. I also got important feedback from the students in my finance class at Yale, where an early draft of this book was assigned as a supplement to the textbook.

I wanted a youthful perspective. I wanted to see the financial world from the vantage point of those whose lives are still taking shape, who are launching their careers, whether in finance or in other fields—and they came through wonderfully for me. They are not responsible for any errors I may have made.

My administrative assistants Carol Copeland and Melissa Studer were a source of constant support. My wife Virginia, who is a psychologist in private practice and a clinical instructor at the Yale Child Study Center, was, as always, a deep collaborator in all my thinking. She has made possible all the things I do.

I thank the Public Lectures Committee at Princeton University, who invited me to give the Walter Edge Lecture, Finance and the Good Society, in which I presented, and received feedback on, an earlier version of the ideas set forth in this book. I am indebted to Peter Dougherty, director of Princeton University Press, for his great help in conceptualizing and developing the book.

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Thanks are also due to everyone at the press and indeed to the book publishing industry as a whole, for promoting the broader discourse that ultimately made this book possible. I am a believer in achieving understanding through books , not just scholarly articles in professional journals, since I believe that the more comprehensive discussion of a topic that books permit ultimately leads to a broader understanding of any subject.

This book began as a work for my students, and I included many references to books for them, as any good teacher would. Yet even after I had decided that this was really a book for the general public and not just for students, I persisted in including numerous references.

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  • ‘Finance and the Good Society,’ by Robert J. Shiller.
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  • I believe it is important for all readers, including my professional colleagues, to spend time with whole, readable books on broad topics rather than just the specialized scholarly literature. I do not think of these books as popularizers, but as synthesizers, originators, provokers, and inducers. That is how I view this book—and hope others will as well. What are we to make of a book called Finance and the Good Society? To some readers, this may seem an incongruous coupling of concepts. He makes a powerful case for recognizing that finance, far from being a parasite on society, is one of the most powerful tools we have for solving our common problems and increasing the general well-being.

    We need more financial innovation--not less--and finance should play a larger role in helping society achieve its goals. Challenging the public and its leaders to rethink finance and its role in society, Shiller argues that finance should be defined not merely as the manipulation of money or the management of risk but as the stewardship of society's assets. He explains how people in financial careers--from CEO, investment manager, and banker to insurer, lawyer, and regulator--can and do manage, protect, and increase these assets.

    Finance - and the good society? - Carlos Ordenador @ WikiStage ESCP Europe

    He describes how finance has historically contributed to the good of society through inventions such as insurance, mortgages, savings accounts, and pensions, and argues that we need to envision new ways to rechannel financial creativity to benefit society as a whole. Ultimately, Shiller shows how society can once again harness the power of finance for the greater good. The Big Short. Zero to One. We need more financial innovation — not less — and finance should play a larger role in helping society achieve its goals. He explains how people in financial careers — from CEO, investment manager, and banker to insurer, lawyer, and regulator — can and do manage, protect, and increase these assets.

    He describes how finance has historically contributed to the good of society through inventions such as insurance, mortgages, savings accounts, and pensions, and argues that we need to envision new ways to rechannel financial creativity to benefit society as a whole.