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Team Player: Robert Shiller on Finance as Panacea

November 26, 2013 in Economics

By Mises Updates

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Team Player: Robert Shiller on  Finance as Panacea

 Book Review by John Staddon

Shiller, Robert J. Finance and the Good Society. PrincetonUniversity Press. 2012. 304 pp. 

Yale professor Robert Shiller is one of the most influential economists in the world.  Co-inventor of the oft-cited Case-Shiller index, a measure of trends in house prices, he is author or co-author of several influential books about financial crises.  He shared the 2013 Economics Nobel with Eugene Fama and Lars Peter Hansen.

In 2012 Professor Shiller published a full-throttle apologia for plutocracy: Finance and the Good Society.  FATGS is a reaction to the hostility to finance provoked by the 2007+ crisis.  But rather than being an effective defense, FATGS just underlines what is wrong with present arrangements.

Shiller sees the solution to our still-unfolding problems not as less financial invention, but more: “Ironically, better financial instruments, not less activity in finance, is what we need to reduce the probability of financial crises in the future.”  He adds “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. The political climate may well stifle innovation and prevent financial capitalism from progressing in ways that could benefit all citizens.”

Is he right?  Is financial innovation always good?  Have the American people turned into Luddites, eager to crush creativity and settle into a life of simplistic poverty, uncorrupted by the obscure and self-serving creations of financial engineering?

Yes and yes, says Professor Shiller, who applauds what others deplore in the rise of ‘financial capitalism’ which Shiller describes as “a system in which finance, once the handmaiden of industry, has taken the lead as the engine driving capitalism.”

Finance capitalism, a new name but an old idea, has been unpopular for years.  In the 1930s, especially, right after the Great Depression, the big finance houses, like J. P. Morgan were seen as conspirators against the public interest.  Goldman Sachs, the ‘great vampire squid’ of Rolling Stone’s Matt Taibbi, plays the same role these days.

Some of Shiller’s defense of the financiers is simply puzzling because it is pretty obvious nonsense.  This is what he has to say about securitization – the bundling of hundreds of mortgages into layered bonds that have been sold all over the world:

Securitized mortgages are, in the abstract, a way of solving an information asymmetry problem—more particularly the …read more

Source: MISES INSTITUTE

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