Can economist Robert Shiller fix finance?
Yale University economist Robert Shiller at the 2012 World Economic Forum meeting in Davos, Switzerland. / World Economics Forum
(MoneyWatch) Yale University economist Robert Shiller was one of the first in his field to warn of the housing bubble. His creation of the Case-Shiller housing index, his dogged and punctilious analysis of financial data -- and the openness with which he's shared it -- have set an intellectual benchmark that's hard to match. He's proved a lucid, independent critic of financial institutions and some of his fellow economists, but is a passionate advocate for finance and the way it can and does make the world a better place.
Unlike many economists who seem unaware that their discipline has lost much of its credibility in recent years, Shiller is appropriately distraught at the seeming disconnect between economics and real-world social concerns.
"My own university, Yale, used to have a department of sociology, economics, and Government," Shiller told me. "And in 1927 they split them into three departments. I think that was a momentous institutional change -- it allowed economics to be cut off from other disciplines. Now they're in separate buildings. You have to walk some distance. It's utterly amazing to me how rarely economists quote the greats in psychology or sociology. Maybe they're read them, but they're not in their active mind."
Shiller makes a powerful case that, while recent scandals make it easy to forget, financial innovation has done a lot of social good. As as an example he cites the creation of insurance. Because of it, almost everyone -- not just the rich -- can bounce back after an accident, fire, theft, or other calamity. In the past, such hardships could financially ruin a family forever.
That vital link between financial innovation and social goods is what we need now to remember, to bear in mind, and to recapture.
It's worth noting that I know many people in banking and finance who are committed to using their expertise and their institutions to empower and fuel constructive, value-creating businesses. What troubles me is that they are mostly overwhelmed by a culture that just can't resist the fast buck, market flimflammery, and related manipulation that earns them champagne, big bonuses, and the admiration of their professional peers.
In the face of repeated financial scandals and fraud, Shiller places his faith in education and oaths. Individuals need to better understand what financial products they're being sold, he believes. They also need access to more, and better trained, financial advisors.
"Most people are in a situation where they are confronted with salespeople pushing financial products they don't understand," Shiller said. "We have to work on improving that situation. I also think we need more financial advisors, people who will sign an oath of allegiance to the client."
It's hard to see how any of these recommendations could cause harm. But are they enough? I appreciate the logic that says we need more good finance to undo the damage of bad finance. And I'm impressed whenever people as knowledgeable as Shiller manage to resist pessimism.
But it is difficult to name a single financial institution these days that isn't somehow tainted by or associated with scandal, perverse incentives, and bad management. Even bankers talk to me about the corrosive influence of the arrogance and greed that pervade the financial industry, wondering how that can be eliminated, or at least contained.
I'm not sure a financial advisor's oath is going to move the needle as far as it needs to swing. But reintegrating economics into real life wouldn't be a bad place to start.
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