Finance and the Good Society – Robert Shiller [Book Summary]

by Nick

What can be said good about finance and the financial sector?

A lot of things, says the famous economist Robert Shiller. Although most of the society is indignant at the excesses and abuses of the financial sector, Schiller’s words in defense of his public good sound convincing, even emotional.

However, his voice is lonely. Schiller argues that crooks may come across in the financial industry, but for the most part, its employees are smart, honest, hardworking people who strive to build a just society.

He is right when he talks about how the financial sector helps society develop, but his rhetoric still shows a desire to soften the memories of the recent past about egregious corporate greed and violations of the law. Citing a number of examples of ambiguous behavior, the author of the book at the same time calls investment bankers “keepers of the world.”

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Finances: good or evil?

Few people see financial sector activity as a way to make the world a better place, especially after the 2008 recession. Society is very negative towards it. The greed, penchant, and recklessness of financiers made him an easy target for indignant people who were victims of economic collapse. The main goal of the industry is to manage and increase the wealth of investors and investors. This is hardly consistent with the historical definitions of an ideal society based on the principles of equality and justice for all: rich, poor and those in the middle.

“The financial industry, with all its vices and a tendency toward excesses, is a force that can very well help us build a more prosperous and fair society.”

Nonetheless, financial capitalism, which is “an economic system dominated by financial transactions rather than production or trade,” plays an important role in achieving the goals facing society and individuals. Finances support a “goal architecture,” a system of ways in which society can satisfy the interests of all its members. Loans, acquisitions, and mortgages are just ways to accomplish important goals – financing a startup, expanding a business, or buying a new home. Financial innovations aimed at the democratization of pensions, insurance, and mortgages have contributed to the growth of living standards for millions of people.

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“Finance is not a set of ways to make money. This is a practical science designed to support completely different goals, namely the interests of society. ”

Reasonable regulation, combined with an understanding of how the manifestations of human psychology affect the economy, can create all the prerequisites for more active development of financial innovations and democratization of processes while eliminating loopholes for the emergence of economic inequality.

Seeing in the financial industry a huge insensitive monolith, for which there are only strict statistics and an eternal desire to increase profits, we thus discard people who guard the interests of society and fulfill its goals. In fact, these participants in the financial system perform various functions and bear numerous responsibilities, although perhaps not always perfect.

Who are they?

Executive Directors

They are the embodiment of the values and goals of their employees. The Chief Executive Officer (CEO) is primarily responsible for the future. For an open joint-stock company, the stock price is a daily assessment of the performance of the CEO. Thus, linking the compensation package to increase the stock price ensures the manager’s mood to achieve long-term goals. On the one hand, the absolute level of payments to company heads is determined by the market.

Regulators, on the other hand, have to say something about the remuneration structure itself when the company “becomes too big to allow it to go bankrupt”. It is possible to prevent the dishonest actions of the leaders of the giants of the financial market, who, succumbing to the temptation, take unreasonable risks, knowing that the government will not leave them in trouble.

For this, companies must pay compensation to directors in installments, deferring a significant share of the compensation package for up to five years. In the event of bankruptcy of the company or involvement of the state in its rescue, the CEO loses the right to the deferred part of the remuneration.

Investment Managers, Bankers, and Mortgage Lenders

By managing their clients’ securities portfolios, investment managers share information and their expert opinions with them. Since such responsibility requires honesty and diligence, investors should be able to somehow evaluate the results of their investment manager. For an accurate assessment, they need reliable sources of information.

Like investment managers, commercial banks should maintain an impeccable reputation by demonstrating the fulfillment of all their moral obligations to save depositors’ money. Unfortunately, the expression of the 1930s “banker-gangster” reappeared in the vocabulary of Americans: now this is the name of investment banks that have gone into shady unregulated activities, thereby increasing the risks for their customers.

“The key to achieving our goals and strengthening human values lies in supporting and continuously improving a democratic financial system that takes into account the various motives of people.”

Banking services began to democratize in the 19th century with the advent of building cooperatives, and today this trend continues in the microfinance system. But banks still have a lot to do to provide everyone with their services: for example, one in four out of 20% of the poorest Americans does not even have a bank account.

Since society views housing as one of the basic human needs, financiers have come up with a mortgage to enable mortals to have their own homes. The securitization of real estate mortgages in recent decades could help meet this need by lowering the level of financial barriers to buying a home. However, in reality, it provoked a massive awakening of greed and the rise of speculation, resulting in a huge bubble. However, this bubble has given impetus to innovation. The possibility of introducing such instruments as “pre-planned restructuring”, which defines the actions of the parties in case of a problem mortgage loan, or “shared property right to housing”, which allows homeowners to sell part of their housing, is currently being considered.

Traders and Market Makers

Markets cannot function fully without traders. Market makers take the risk of securing the quotes and liquidity of securities and should receive tax benefits for this. Modern technologies allow these professional market participants to quickly make transactions, and not only with stocks and bonds, but also with other instruments.

Theoretically, bidding in the format of a “predictive market” of events in real estate, consumer prices and GDP could convey the necessary information to all participants. It is known that the price that develops as a result of bets on options for a future situation can serve as an indicator of the probability of a particular event, that is, the price itself is very informative. Such bidding could, for example,

Insurers, Financial Engineers and Derivatives Providers

Most people do not fully understand how important insurance is in terms of loss protection. Insurance companies not only do everything to mitigate the financial losses of their customers; they also encourage society to continually raise safety standards. One of the urgent needs of society is to ensure the maximum number of people, in particular in order to protect the poorest inhabitants of the planet from agricultural risks and natural disasters.

Thus, new areas of insurance arise, such as protecting owners from lowering the cost of their housing, as well as “insurance against loss of a source of income”, designed to encourage people to try their hand at a new activity. Financial engineers and so-called market designers can help implement socially significant innovations. An example would be the “New England Kidney Exchange Program,” organized by a professor at Harvard University to facilitate the search for a donor organ for a transplant.

Original market schemes can help solve other social issues, such as finding a partner to start a family or helping pharmaceutical companies develop drugs for treating little-known diseases. Derivatives and options can shift risks to others’ shoulders or reduce them – thus they acquire a more important role than just speculative securities. Original market schemes can help solve other social issues, such as finding a partner to start a family or helping pharmaceutical companies develop drugs for treating little-known diseases.

Derivatives and options can shift risks to others’ shoulders or reduce them – thus they acquire a more important role than just speculative securities. Original market schemes can help solve other social issues, such as finding a partner to start a family or helping pharmaceutical companies develop drugs for treating little-known diseases. Derivatives and options can shift risks to others’ shoulders or reduce them – thus they acquire a more important role than just speculative securities.

Lawyers, Financial Advisors, Lobbyists and Accountants

Each of these specialists helps make money work, but less affluent citizens have limited access to it.

The government should subsidize the payment of legal and financial advice, as it does with respect to medical services, so that everyone has access to the necessary information and make informed financial decisions. By making consultations available to a wide audience, the situation in the economy could be significantly improved. Lobbyists give advice to legislators on the adoption of certain laws and convey to them the wishes of their customers.

But today, in the vast majority of cases, they use their influence to protect the interests of corporations, which often remain in the background. The poor and middle class need lobbyists to convey their point of view to lawmakers. It is necessary to provide financial support for “lobbying for the public interest”. Accountants manage arrays of financial data, linking the current situation with the vision of the future set forth by the CEO. The system needs honest and impartial accountants. They must guarantee market participants the correctness of financial transactions.

Regulators, Officials, and Public Sponsors

These administrators have important control and service functions for the financial community. Regulators are designed to maintain system integrity. They can be both public servants and representatives of the financial industry, for example, employees of “self-regulatory organizations”.

Along with the leaders of the central bank, they should monitor compliance with established standards, as well as monitor everything that happens in the industry in order to prevent possible crises in time. The experience of recent years teaches us that neither one nor the other is often not enough to guarantee the stability of the economy. Fiscal policymakers need more reliable tools to combat economic instability. For example,

“Financial capitalism has not yet been fully formed.”

Public goods such as postal services, roads, clean air and scientific knowledge are crucial for any society, but do not have direct economic benefits for private business. Therefore, the state is involved in important infrastructure issues. A good example of how it can collaborate with the private sector in the production of public goods is the US National Science Foundation, which finances research from companies and universities from the state budget.

Teachers, Trustees and Philanthropists

Universities tend to view finance as a practical professional discipline. Meanwhile, finance should be taught as a kind of “intellectual discipline” aimed at studying the “social, practical, and moral-ethical component” of business. This would have had a tremendous impact on students, both from a universal point of view and from a professional one, as well as future economists, businessmen and political leaders.

“The democratization of finance goes hand in hand with its humanization.”

Owners of huge fortunes are responsible for how their assets work for the good of society. Renowned steelmaker Andrew Carnegie provided financial support to the museum, university and other research and educational institutions. Bill and Melinda Gates and Warren Buffett led the Oath of Giving campaign, inviting billionaires to spend 50% of their fortune on charity.

Simple People

According to one school of science, faceless, nameless financial companies are determined to deceive citizens to enrich a handful of people. But the workers in the financial industry are the same people, and they have the same psychology, physiology and emotions. They are not robots for which only numbers are important, and among them there are even artists, writers and philosophers. The writer Henry David Thoreau was a businessman and inventor, and the income from this activity allowed him to work on books. Sculptor Jeff Koons traded commodity futures in a large financial company.

“With a great fortune, you can’t do anything on your own that would bring satisfaction — unless you share it.”

People who do not belong to the sphere of finance often find it too complex and understandable only to the initiates. They resist innovations that help distribute benefits more equitably. For example, mortgages, mutual funds, and corporate shares are socially useful products, but it took centuries to become part of the mass consciousness.

Financiers and the government need to make even more efforts so that ordinary citizens feel confident in financial matters and can benefit from financial services. One option is to draw a clear line between “useful” and “bad” debts. The former helps people achieve their financial goals and serve the public good (a vivid example is the Marshall Plan). The latter are the result of that borrowers have little idea of lending conditions. Before the crisis in the real estate market, many mortgage borrowers did not even know the true cost of their loans and fines.

The Myth of Financial Evil

Manifestations of immorality among those associated with finances are inevitable. Scoundrels who use the information to enrich themselves and harm others by their actions cast a shadow over the entire industry, the majority of which are honestly involved. Nevertheless, the benefits of the financial system as a whole should outweigh the deeds of a handful of pests.

If society succumbs to the myth of the immorality of financial capitalism, then this could adversely affect the future of the world economy. Public anger can lead to the government having to impose severe restrictions on the industry. Such measures are likely to reverse all the positive processes that are now being observed, and also lead to a significant weakening of innovation in the field of finance.

Conclusion

  • Financial capitalism, “an economic system dominated by financial transactions rather than production or trade,” plays an important role in realizing the goals of society.
  • The democratization of financial products such as pensions, insurance, and mortgages has contributed to raising the living standards of millions of people.
  • Considering the financial industry as a faceless monster, we do not recognize the merits of those who are responsible for solving problems important to society.
  • So, the CEO is responsible for the future of his organization, and bankers and investment managers daily help people implement their plans.
  • Traders and market makers provide transparency of operations, which allows markets to function normally.
  • Insurers and financial engineers are finding ways to reduce risk.
  • Lawyers, consultants, lobbyists, and accountants provide substantial support to the financial sector.
  • Regulators and officials responsible for government policy in various fields support the integrity of the financial system.
  • Teachers, trustees, and philanthropists work for the future.
  • Not all members of the financial community are robots for which only numbers are important. Among them are artists, writers, and philosophers.

Why You Should Read “Finance and the Good Society”

  • To become a more developed financial expert
  • To start making the right financial decisions
  • To support the work of the global financial mechanism.

This book is available as:

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