He was the greatest central banker who ever lived, and he left in a blaze of glory. The angels sang at his feet, and he could never be wrong. But when the storm broke, Alan Greenspan became the villain of the century. A liberal lynch mob was soon upon him and the messiah of laissez-faire was last seen at the edge of the forest. Last reported, even a Google search couldn?t find him.
With the depth and breadth of the crisis that blew up in 2008, perhaps it was not surprising that the world at large directed its ire against the masters of finance?bankers, CEOs, speculators, insurers, traders and policymakers. The anger has led to calls for cutting CEO pay, breaking up big banks, tightening controls and even dismantling the US Federal Reserve. However, while the anger is justifiable, the cause may not be. Finance is not necessarily the villain it is made out to be, but a force for good which must be promoted for the advancement of human society, argues influential economist Robert J Shiller in his latest book, Finance and the Good Society.
?Finance? and ?good society? in the same sentence? Yes, it is not so hard to digest, assures the Yale university professor, who co-invented the S&P Case-Shiller index of US house prices. While finance?like any other stream?offers scope for corruption, manipulation and misuse, it is a positive force and must be approached that way. Human prosperity has dovetailed advancements in banking, insurance and home mortgages, says Shiller. Though financial innovation of the last decade is often seen as the villain who blew up the world, leading to suspicions about all kinds of financial tools, it is more innovation, not less, which will take the society forward. Shiller sticks his neck out into a market still seething with rage at financiers and deserves praise for making the attempt. Divided into two parts, Finance and the Good Society makes a case for finance as a humanising force, which must be advanced further in the interests of a more equal, just and competitive society.
The book is not an aggressive defence of free market capitalism or its individuals, instruments and institutions. Without glorifying any of them, Shiller conducts a clinical dissection of the roles and responsibilities of major players in the financial world, including CEOs, bankers, investment bankers, portfolio managers, speculators, lobbyists and lawyers in the first part of the book, pointing out the criticality of each and every actor. He makes no attempt to hide the fact (yes, the fact) that a large number of these players abused the system, but argues that the way to realise a better world is more finance and more innovation.
Most of us agree that despite their shortcomings, banks, mortgage lenders and insurance companies are critical to a modern economy. What many do not realise is that convenient scapegoats like lobbyists, traders, speculators and securitisers too play a critical role in a market economy, though their roles are not obvious to the general public. Shiller makes a case for more lobbying, not less, since this is the best way to promote the interests of small groups to legislators who have little time and expertise to go through the nitty-gritty. But wait, the author is not arguing for Big Finance lobbying for its own vested interests, but for society to push its own demands to lawmakers. Similarly, speculation, asserts Shiller, contributes to market efficiency
Mortgage securitisers have been blamed for ?slicing and dicing securities? and investment banks for hawking them to unsuspecting global investors, spreading the risk worldwide. However, mortgage securitisation has improved public access to finance and thereby led to greater home ownership, which in itself is a worthy goal, says Shiller. The author does not defend the malpractices which tanked the global economy, but points to the key roles of various maligned actors. ?There may well have been some moral lapses behind these events, but it is not correct to claim that these institutions acted deliberately in full knowledge of the actual outcome. To the extent that they misbehaved, it was not really in their ex ante interest to do so,? argues the author. Citing studies on evolution, neurobiology and psychology, Shiller also posits that greater democratising of finance can even help reduce aggression in society.
A world charmed by Occupy movements and confused angst is likely to see any peddler of finance as a charlatan. However, Shiller sounds credible in his defence of financial capitalism. Why? Even as he admits that inequalities are on the rise, partially due to excesses of financial capitalism, he is convinced that these inequalities must be reduced with greater financial innovation to make for a more egalitarian world. Shiller supports progressive taxation and praises Roosevelt?s New Deal as a ?humanising social force which retained the strength and integrity that characterise the best financial institutions?. He makes a strong case for philanthropy and charity, listing out several incentives to promote more giving. Finance, as he sees it, is not a means for accumulating wealth; and if you have made a fortune through a life in finance, plan out how to give it away. John D Rockefeller, Andrew Carnegie, Warren Buffett and Bill Gates receive Shiller?s praise for earning their riches and giving them away. The author also talks of inequality indexation, which could reduce existing inequalities in the society.
In the last chapter of Finance and the Good Society, Shiller turns philosophical. The ruling consensus before the First World War was that nations must pursue aggression against other nations since aggression was part of human nature and war alone could assure self-preservation. The Great Illusion of those days, the author notes, was that aggression could lead to greater wealth. Despite academic works which disproved the advantages of waging war to promote welfare, this prevalent illusion sparked an arms race and led to two world wars and incalculable misery. According to Shiller, the modern world?s Great Illusion is that the masters of finance are a batch of pirates out to loot society?s wealth. Unless finance is corrected and promoted, this illusion can lead to dangerous outcomes and long-term setbacks for the society.
The global economic crisis led to an unchallenged consensus that finance is evil. The plethora of books that followed the crisis hammered home the ?truth? that banks are villains. In his defence of finance as a force for good, Shiller takes a cautious step into a minefield. The step is welcome. A journey in this direction could be our ultimate hope for finding Greenspan and the defenders of free market hiding from flame-throwers.
