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The
New Financial Order:
Risk in the 21st Century
(2003)
Robert
J. Shiller
Big
Brother meets the Free Market
This is a big, big book.
Although it contains only 276 pages of commentary, its scope envisions a
brave new world we can only imagine and argue about. No doubt the outcome
of the argument will weigh heavily on our future for years to come.
Professor Robert J. Shiller needs no introduction. Whether by intent or
luck, his “Irrational Exuberance” warning about our overvalued stock
market was published around the time NASDAQ topped out just above 5000
(March 2000). The rest is history. And while I, as a former member of two
options exchanges, certainly welcome any suggestion to increase the
trading opportunities available to us today, the six innovative financial
instruments he proposes to reduce/share risk leave a lot to be explained,
both mechanically and philosophically. The book, though, rates five stars
for its thought-provoking ideas and for the stature that Shiller brings to
them. There’s a lot in this book and nothing in it should be discarded
without extensive study and reflection. One of life’s hardest lessons to
accept is that none of us, either individually or collectively, can ignore
the dynamic world we live in. Sitting still is not an option because of
the relative motion of everyone else in the world. Our only choices are,
in the immortal words of Lee Iacocca, “Lead, follow, or get out of the
way.” Today’s informational databases were sure to evoke something
like Shiller’s ideas. It is useless to turn our heads because it will
happen. Therefore the intent of this book should be exposed to the largest
possible number of people because what we decide will determine how we
spend the rest of our lives. On the surface, Dr. Shiller would be creating
a Dr. Pangloss world, but the devil would be in the details.
The most obvious aspect
of Shiller’s proposals is that he would use classical capitalistic
markets to achieve classical socialistic goals. A most creative feat in
and of itself. Insuring against risk, of course, is nothing new. Lloyd’s
of London dates back to Edward Lloyd’s coffeehouse in the late 1680s.
But not only does Shiller want to mitigate the risk of error in individual
decision making, he also wants to insure “society” against the
collective mistakes of all. It will be interesting to see which power
groups line up on which side of the argument. Maybe he isn’t proposing
cradle-to-grave socialism, but certainly something close to
young-professional-through-retirement risk sharing as
administered/regulated by a combination of governmental/financial
superbodies.
He convincingly begins
his presentation with a short history of how new innovations are always
refuted at first, then eventually work their way into our lives. This is a
good start to set the stage for his own ground-breaking ideas.
There is no point in
going over the mechanics of the proposals because they will see many
different permutations before they ever become tradable entities, but more
important are the goals and philosophy that pushes them all.
His first proposal covers
personal insurance: livelihood insurance to reduce the risk of people
embarking on a dead-end profession. He is inspired here by the very
legitimate concern that society losses out on tremendous talent when
gifted individuals steer away from professions that might not pay off in
the future. He feels that if we insure them against this failure, their
contributions will pay off in the long run. Also included in personal
insurance is his proposal for home equity insurance to guard against a
decline in your home’s value. He’s already put his money where his
mouth is by incubating such a company and then selling it to a financial
conglomerate.
Next is MacroMarkets.
Here he envisions GDP futures to enable trading in national economies
based on how they perform. One of the benefits here would be when a
country’s GDP begins to weaken, it would be a signal to the affected
economy’s leaders that something must be done to remedy the situation or
else things will get worse.
Third, he addresses
banking and income-linked loans. Interest rates on loans would rise or
fall with one’s income, region, or profession, and could be used to
modify or eliminate current bankruptcy laws. However, could a bank stay
solvent by lending money on fluctuating terms unless it could also pay
interest on fluctuating terms? We’ve just lived through the S & L
crisis born out of this same scenario.
Fourth, he tackles his
most inflammatory subject, that of income inequality. His basic fear here,
along with Dr. Ravi Batra and others, is that increasing disparity of
income leads to riots, revolutions, and war. But who decides what is fair
and equitable? And would an earlier leveling effect have robbed us of the
builders Carnegie, Rockefeller, and Ford up through Walton and Gates?
Fifth –
Intergenerational social security. This is the most pressing problem today
and will cause the most heated debates going forward. What is fair can be
debated until we all die of old age.
Last, he would like to
set up swaps between rich and poor, strong and weak nations based on their
GDPs. But what happens when politicians are accused of “exporting
jobs” like companies are today? They won’t be in office very long. The
IMF doesn’t have a great record getting the masses to toe the line
either when it comes to living up to prior agreements.
The scariest ingredient
of all Shiller’s proposals is the collection, retrieval and analysis of masses of amounts of information (GRID) needed to
administer such an interconnected trading arrangement. Yet, the Internet
is making us one people, and Shiller’s financial instruments would make
us one world, interconnected, co-dependent, and risk-sharing. If
Clausewitz was right that war is politics by other means, then perhaps
politics is economics by other means. Maybe the time has come for
economics to supercede politics and maybe Shiller is showing the way. He
does have a vision. Do we want to be part of it or not?
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