Finance and the Good Society | Robert J. Shiller

Summary of: Finance and the Good Society
By: Robert J. Shiller

Introduction

Welcome to the world of ‘Finance and the Good Society,’ where Robert J. Shiller explores the powerful potential of an often-misunderstood field. Delve into the true essence of financial capitalism and the role it can play in promoting societal well-being. Discover how prudent regulation, effective management, and an appreciation of human psychology can help pave the way for increased financial innovation and democratization. Beyond mere profit-making, learn about the numerous financial roles that work together to advance human interests, from CEOs and investment managers to mortgage innovators and market traders. Finance has the power to create the ‘good society’ we all aspire to—so let’s explore how.

The Positive Power of Finance

The potential to improve society through finance is often overlooked due to the negative perception of the financial industry. However, finance has the ability to create a more prosperous and equitable society. Finance serves as a means to attain beneficial objectives such as start-up funding, business expansion, and new homes. It provides a “goal architecture” for advancing the interests of all members of society. Financial innovation has made life better for millions through democratizing pensions, insurance, and mortgages. Viewing finance solely as a means to make money undermines the fact that it exists to support other societal goals. The participants in the financial system, who are responsible for executing these goals, already play many roles and discharge many duties, albeit with room for improvement. With prudent regulation and an appreciation of human psychology, finance can continue to become more democratic and help society achieve its goals.

A CEO’s Responsibility to the Future

The CEO of a corporation plays a vital role in setting the values and goals of the organization, especially for future generations. As a long-term commitment, the CEO’s remuneration should be tied to the company’s stock price appreciation while regulators maintain control over its structure. To prevent moral hazard, firms should defer a significant portion of CEO compensation for up to five years and give up rights to the deferred amount if the company fails or requires government rescue.

The Challenge of Democratizing Banking

Investment managers and commercial banks have a responsibility to be honest and diligent in handling client portfolios and safeguarding depositors’ funds. To accurately judge their performance, investors need better sources of information, and banks need to reach everyone, including the quarter of the poorest 20% of Americans who have no bank accounts. The securitization of mortgages in recent years created a massive bubble of speculation and greed, but also sowed the seeds of creative solutions to reduce financial barriers to owning a home, such as pre-planned workouts for distressed mortgages and home equity fractional interests. The key to achieving our goals and enhancing human values is maintaining and continually improving a democratic financial system that considers the diversity of human motives.

Market Makers and Prediction Markets

Markets require market-makers who provide liquidity and set prices, and they deserve tax credits for their services. Technology has enabled traders to deal with different financial instruments rapidly. Prediction markets in real estate, GDP, and consumer prices may uncover valuable information for all traders. Hypothetically, trading on risky bets before the 2008 real estate crisis could have dampened or prevented it. The likelihood of an event happening can be predicted from the price of betting on the event. Such trading may have exposed market sentiment before the 2008 crisis.

The Social Importance of Insurance and Market Design

Most people underestimate the role of insurance in protecting them from loss and promoting better safety practices. Extending insurance to new areas such as protecting against declines in home equity and promoting new careers can be a major social necessity. Financial engineers and market designers can create socially useful innovations to solve social issues. Take the example of the New England Program for Kidney Exchange, which uses a market mechanism to expand the number of available kidneys for transplantation. Ingenious market designs can also address finding an appropriate marriage partner or encouraging drug companies to find treatments for little-known diseases. Derivatives and options can mitigate social risks and provide social value beyond just speculative securities. It is a paradox that the financial system that enables our greatest achievements can also create disasters, but by developing socially responsible market designs, we can create a better world.

Access to Financial Advice

Everyone should have access to legal and financial advice, just like healthcare. Government subsidies for guidance would improve the economy, as lobbyists mainly serve corporate interests. Impartial accountants are crucial in creating trust in financial transactions.

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