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Random walk

16 Mar 2012 By Edward Hadas

Financial repression is the theme of the moment, and that’s a slap in the face for Robert J. Shiller, who thinks investors should be protected, not exploited. The possible UK government 100-year fixed coupon bond, which would be issued at an artificially low rate, is almost the antithesis of everything Shiller believes in.

Shiller the stock market commentator is much loved. But Shiller as advocate of financial justice? That’s another matter. Unfortunately, his latest book is unlikely to change many minds at the UK’s Debt Management Office either. That’s a shame, since there’s a 40-page near-masterpiece of the genre hidden in the 239 pages of his new book. A shorter paper would present Shiller’s distinctive, and mostly persuasive, vision of how finance can better serve the common good.

Shiller notes that the “democratisation of finance” has already come a long way, but he argues it could go further with better financial products and techniques. That key point is only made clearly at the end of the book, and he never discusses clearly the social benefits of finance. He should have dedicated a few pages to the ability of banks, insurers and financial markets to gather and allocate capital effectively and provide a healthy check on wayward governments.

That would take five or ten pages. The rest of the article would discuss some of Shiller’s extremely interesting proposals in more detail than he manages in the book as it stands. Flexible debt would come first: and bonds whose coupons are linked to rises (and falls) in GDP are not his only idea. There’s also the constant-value unit of exchange, continuous-workout mortgages and insurance against home price losses. Each of these raises practical issues but they are all far more appealing examples of financial innovation than the usual products of investment banks.

Also compelling is his idea of an inequality tax. Under that regime, tax rates would not be set in advance but would change along with pre-tax income inequality to be exactly progressive enough to ensure that the after-tax distribution of incomes was socially acceptable. It’s technically possible, politically desirable and deserves more attention.

There are also two more common but still good ideas – the further spread of corporate ownership, especially to employees, and the classification of some debts as odious and not subject to the same enforcement as salubrious obligations. In the ideal article, Shiller would give more attention to the practicalities of these notions than he does in “Finance and the Good Society”.

Sadly this is – at best – a hit-and-miss book. The first 18 chapters, 127 pages, are a whirlwind tour of the world of finance with a chapter for everyone from investment managers to philanthropists. But the purpose of this survey is unclear.

The rest of the book is better, though marred by simplistic discussions of neurology, animal behaviour and human psychology. The last does not rise far above the generalisations about group behaviour typical of popular treatises on investment. There are a few entertaining digressions – discussions of his grandparents’ character and of a 1910 book about war, for example – but the digressions from economics are at best the work of a clever amateur.

Shiller is arguably the most imaginative and informed thinker in finance today. Perhaps he will put those talents to better use in his next book.


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