Saturday, September 01, 2012

More power to power suits

Ever since the edifice of the global finance industry started crumbling in 2008, readers revelled in the following terms to berate the cogs of this giant machine: vampire squids, one per cent, fat cats. In his new book, Finance and the Good Society, Yale professor Robert J Shiller says we are getting it all wrong. His passionate defence of the financial industry’s panjandrums should elicit a huge collective gasp, last seen in 1965 when Bob Dylan chose to play electric instruments.

Mr Shiller asks a very important question: what if the biggest problem is not capitalism’s failure to deliver on its promise, but the promise itself? The book is divided into two parts. The first part is about the roles and responsibilities of the architects and stewards of finance: investment bankers, mortgage lenders, insurers, policy makers, philanthropists and economists. Even with the glut of recession literature clogging bookstores, Mr Shiller speaks about the finance workforce in a very original manner.

Over five to seven pages, Mr Shiller articulately describes the responsibility of each driver of financial capitalism, and how rapacity set in over the past few years. The chapters on lesser-known parts of the workforce – derivatives providers, financial advisers and non-profit managers – made me feel like a cave-dweller walking beside Plato, which is a good thing. Nothing escapes Mr Shiller’s gimlet eye, but his idealistic view of the industry sometimes borders on naivety. Speaking about an MBA education, he says, “Our educational institutions have an obligation to present a view of the true workings of financial capitalism, and to cover both the mathematics and its human, practical and moral side.”

Mr Shiller makes up for this lack of pragmatism through crisp writing and a far-ranging knowledge of economics. To talk about the origins of derivatives, he goes back to the period between the mid-620s and mid-540s BCE when the Greek philosopher Thales gave earnest money for the use of olive presses at an agreed rental rate for a later harvest. This example underlines Mr Shiller’s assertion that earning money is a cinch and that even “philosophers can easily be rich if they like”.

The second part offers a few ideas on how to improve the current system without excising it of its efficacy. Here it appears that Mr Shiller isn’t exactly fully awake. In a chapter titled “Financiers versus Artists and Other Idealists”, he uses a handful of examples to make the point that financiers could make headway in the creative field and vice versa, but his examples are inexcusably bad. He cites Charles Ive, an insurance executive-turned-symphonic composer, and Henry David Thoreau, a revolutionary who used to manage his family’s pencil company, as possible inspirations for the reader. The problem with these examples is that none of them is rooted in the last three decades. Still, he has the audacity to close the chapter with: “This may not be the world about which young artists, philosophers, and poets fantasize, but it is reality — and a reality we must learn to accept. Self-promotion and the acquisition of wealth, whether by financial or other means, is no crime”. Despite 20 years of teaching economics, it does not seem to have occurred to Mr Shiller that a 25-year-old bond trader may think of quitting the job at 40 to write novels but may not find the zeal to do so when the time comes.

Finance and the Good Society is like coaxing ketchup from a bottle: sometimes, no matter how much you try, the sauce inside won’t budge; then it suddenly pours out all at once. A chapter called “Problems with Philanthropy” holds a message for Tim Geithner and Barack Obama. Here’s an idea that should persuade the super-wealthy to loosen their purse strings a lot more often and liberally: “There could be instituted a new kind of organisation that I will call a participation nonprofit corporation… It would raise money by issuing shares, buying shares in it would be a charitable contribution for tax purposes. Selling shares in it would have no consequence as long as the proceeds were donated to other charitable causes.”

For every insightful chapter, there are acres of fallow material. Here’s the leading contender for the year’s clunkiest line: “Financial lobbyists, if they are properly regulated, are essential, for only the financial community has the expertise to understand the financial marketplace and the ability to evaluate policy regarding it. They must of course be monitored and regulated, but a modern economy will necessarily involve such lobbyists.”

Later this year, there are pretty good chances that America might choose Mitt Romney, a Republican and former CEO of Bain Capital, a financial services company, as president. Mr Obama’s campaign is targeted at Mr Romney’s cut-throat tenure as CEO when he slashed jobs. He might dash off a thank-you note to Mr Shiller for making an unequivocally formidable case for his erstwhile métier. Sadly, for Mr Shiller, that could be the only appreciation his vastly uneven book might attract.

Robert J Shiller
Princeton University Press
288 pages; $24.95


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