Finance and the Good Society

391 Pages·2013·2.28 MB·English

by  Robert J. Shiller

Finance and the Good Society
Finance and the Good Society
_______________
Robert J. Shiller
With a new preface by the author
Princeton University Press
Princeton and Oxford
Robert J. Shiller is the Arthur M. Okun Professor of Economics at the Cowles Foundation for
Research in Economics and professor of finance at the International Center for Finance, Yale
University. He is a research associate at the National Bureau of Economic Research in Cambridge,
Massachusetts. He is also the co-creator of the Standard & Poor’s / Case-Shiller Home Price
Indices, and he serves on the index committee for these indices at Standard & Poor’s, New York.
At the CME Group in Chicago he is a member of the Competitive Markets Advisory Council. He is
currently engaged in the joint analysis and development of exchange-traded notes with Barclays
Capital in London. He writes regular columns for Project Syndicate and the New York Times. The
views expressed in this book are solely those of the author and do not necessarily reflect the
views of these institutions.
Copyright © 2012 by Princeton University Press Published by Princeton University Press, 41
William Street, Princeton, New Jersey 08540
In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire
OX20 1TW
press.princeton.edu
All Rights Reserved
Third printing, and first paperback printing, with a new preface by the author, 2013 Paperback
ISBN 978-0-691-15809-9
The Library of Congress has cataloged the cloth edition of this book as follows Shiller, Robert J.
Finance and the good society / Robert J. Shiller.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-691-15488-6 (hardcover : alk. paper) 1. Finance—History. 2. Capitalism—
History. 3. Social justice— History. I. Title.
HG171.S52 2012
332—dc23
2011053481
British Library Cataloging-in-Publication Data is available This book has been composed in
Adobe Palatino and Berkeley Old Style Book and Black by Princeton Editorial Associates Inc.,
Scottsdale, Arizona Printed on acid-free paper.
Printed in the United States of America
10 9 8 7 6 5 4 3
Contents
Preface to the Paperback Edition vii
Preface xiii
1
Introduction: Finance, Stewardship, and
Our Goals
Part One
Roles and Responsibilities
1. Chief Executive Officers 19
2. Investment Managers 27
3. Bankers 37
4. Investment Bankers 45
5. Mortgage Lenders and Securitizers 50
6. Traders and Market Makers 57
7. Insurers 64
8. Market Designers and Financial 69
Engineers
9. Derivatives Providers 75
10. Lawyers and Financial Advisers 81
11. Lobbyists 87
12. Regulators 94
13. Accountants and Auditors 100
14. Educators 103
15. Public Goods Financiers 107
16. Policy Makers in Charge of Stabilizing 111
the Economy
17. Trustees and Nonprofit Managers 119
18. Philanthropists 124
Part Two
Finance and Its Discontents
19. Finance, Mathematics, and Beauty 131
20. Categorizing People: Financiers versus 135
Artists and Other Idealists
21. An Impulse for Risk Taking 139
22. An Impulse for Conventionality and 143
Familiarity
23. Debt and Leverage 151
24. Some Unfortunate Incentives to 159
Sleaziness Inherent in Finance
25. The Significance of Financial 168
Speculation
26. Speculative Bubbles and Their Costs to 178
Society
27. Inequality and Injustice 187
28. Problems with Philanthropy 197
29. The Dispersal of Ownership of Capital 209
30. The Great Illusion, Then and Now 219
231
Epilogue: Finance, Power, and Human
Values
241
Notes
References 257
Index 273
Preface to the Paperback Edition
A
s I prepare the paperback edition of this book,
Finance and the Good Society, tens of thousands of students around the
world are about to enroll in university courses on economics and
finance, just as even more young people are about to embark on careers
that get them involved, one way or another, in financial activities. These
young people comprise the most significant audience for the paperback
edition as they ponder their role in an expanding world of financial
capitalism.
While there is nothing especially novel about a new generation of
students and young professionals assuming their places in classrooms
and corporations and nonprofits and regulatory agencies, in recent years
there is something very new about the culture in which they will learn.
That is, the part played by the new financial technologies in
precipitating the ongoing financial crisis has become a matter of public
as well as intellectual concern. Although the “Occupy Wall Street” and
“Occupy London” movements and their variants have passed, their
legacy of anger and criticism lives on.
Anger is still today being nurtured by a major segment of the general
public around the world. There is anger at bankers, brokers, money
managers, mortgage brokers, derivatives producers, and the whole army
of people in professions related to finance who, as the popular story
would have it, created the financial bubble that enriched them and
impoverished the rest of us.
The “Occupy” protesters have left the financial centers around the
world where they set up their encampments. But the smoldering public
resentment and skepticism at advanced financial solutions to the world’s
problems remains, and will likely produce new outbreaks of visible
discontent.
Did the financial community create the financial crisis after 2007
that has done so much to diminish the economic prosperity of so many
people around the world? More to the point, do the practices of modern
finance as seen in the work of highly visible enterprises from Goldman
Sachs through Société Générale, through Sberbank, through HSBC,
support or subvert the goals of a healthy society, a market democracy
built on broad-based prosperity and fairness? Put differently, what is the
proper role of a robust financial sector in promoting the good society?
These are the questions that motivated the work that went into this
book, beginning with the Walter E. Edge Lecture I delivered at Princeton
University in 2010; and with my plenary address in 2010 before the
United Nations General Assembly, as keynote speaker for the opening of
the 65th session of the Second Committee; and finally with the twenty
lectures on financial markets I gave to my own students at Yale, and to
the world through Open Yale free on the Internet. Beginning with these
lectures, and continuing through the 2012 publication of the hardcover
edition of this book and its reviews, a series of subsequent articles and
op-eds, adoption and discussion of the book in finance courses, and a
number of lectures to academic as well as professional groups, this book
has served as a focal point for an ongoing conversation. This
conversation is at various points and turns full of heat or full of light, but
it is a conversation nonetheless.
There is an old saying, attributed to various authors, that “books [as
works of art or science] are never finished. They are merely abandoned.”
An author needs to step aside at some point, but the thinking a book
initiates never really ends. It is carried on by a multitude of others and
intertwined with thinking in other books and other new public
dialogues.
This book is about progress and change, and even more than with
most books it is intended as a conversation starter. It is in this spirit—the
spirit of discussion, collaboration, and dialogue, leading to invention and
change—that I invite finance students and young professionals to take
part in the effort to try to define a clear and compelling connection
between finance and the good society.
This book consists of two parts, following an introductory chapter.
The introductory chapter establishes the context of financial capitalism
in modern history and global society, emphasizing the centrality of
financial innovations, from stock markets through mortgages, in
contributing to the achievement of all of the varied long-term goals
people have, and the role of the finance professions as “stewards” of
society’s wealth. Part 1, “Roles and Responsibilities,” then goes on to
build accounts of the roles played by finance professionals—including
bankers, accountants, lawyers, investment bankers, regulators, and
others—in performing their respective parts in the good society. Part 2,
“Finance and Its Discontents,” written in a different key, raises a series
of questions about the morality and substance of finance in an evolving
society.
In reading this book young finance students and professionals are
likely to find Part 1 of the most inherent interest, because it provides a
smorgasbord-like presentation of the various professional positions that
collectively comprise the field of finance, jobs young readers may
profitably occupy through their working lives. And it is about the often
doubted and often obscured moral purposes of these occupations.
To underscore the relevance of this new preface, I have asked my
publisher to include an article of mine, published by newspapers and
magazines around the world via Project Syndicate in May 2012, “My
Speech to the Finance Graduates.”1 This piece was motivated by the
“Roles and Responsibilities” part of this book, and served to augment it
by specifying the central missions for each part of the finance profession
today’s students are about to enter. It appears at the end of this preface.
Beyond the didactic role played by Finance and the Good Society in
specifying the relevance of modern finance and raising questions as to its
ongoing economic and social role, the discussion that has followed the
hardcover edition of this book has only served to strengthen my
conviction that there is a widespread and profound misunderstanding of
the role that financial markets and institutions play in the good society.
It is not the reviewers of the book in newspapers and magazines who
have shown this misunderstanding. It has been more in evidence among
many of the people who came to my book talks or who emailed me
about the book.
Among the general public, there is clearly a tendency to think of the