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IMF Survey: Don’t Demonize Finance After Crisis, Says Shiller

May 1, 2012

  • Finance is necessary for economic growth
  • Expanding access to finance can lead to better management of risks, goals
  • Finance can be a force for good and good works require finance

Despite the widespread repercussion from the global financial crisis, finance should be embraced rather than demonized, says economist Robert Shiller. In a new book, he argues that access to finance should be enlarged.

Don’t Demonize Finance After Crisis, Says Shiller

Blue mosque in Istanbul, Turkey. Whether to build a hospital or a mosque, we need financing, says Shiller (photo: Peter Adam/Corbis)

FINANCE AND REFORM

In an interview with IMF Survey online, to coincide with the publication of Finance and the Good Society, the Yale economist describes how finance, through inventions like insurance, mortgages, and pensions has historically benefited society.

He suggests that “finance is a powerful tool we can use for the public good.”

IMF Survey online: Many blame the financial sector for precipitating the current economic crisis, so why do you want to extend access to finance?

Shiller: I think people think of finance in the wrong terms. They see it as making money or getting rich. When you think about finance, you should think about financing activities.

For example, if you want a hospital in your community, you have to finance it. If you want better schools or you want a college, you have to finance them. If you want to support a church, build a mosque or anything else—this all needs financing. Anything that we have as a big purpose involves us in finance.

To me, what we have to do is democratize finance. We have to expand it so that it manages the risks and goals of everyone. The world is getting much wealthier, in the main. Economic growth, especially in the emerging countries, is wonderful and it is because of financial modernization.

IMF Survey online: Your book touches upon this widespread belief that those in finance are only out to make money for themselves. So is that really the case?

Shiller: The public loves to criticize people in finance. When movies are made about financiers, they are always represented as evil. I think it is just part of our culture. It is because they make so much money. We do not feel very sympathetic to them.

I think our moral commitments took some beating in the boom that preceded the recent recession. For example, financiers were issuing mortgages, for example, to homeowners that really cannot afford them. They were not telling the truth about the fact that home prices could fall and result in your financial ruin.

And [these moral failings] tends to happen when people think everyone else is doing it, so I have to do it, too.

And now we are in a period—after the crisis—of retrenchment, and we are wondering if this was moral. However, I think it will self-correct.

IMF Survey online: What lessons did we learn from the crisis? How do we ensure we will not be facing another one anytime soon?

Shiller: We will have another financial crisis. It is like saying airplanes crash and ships sink. Mistakes and accidents are part of doing business, being alive and active.

However, I certainly do not want to defend everything that happened before the crisis. I just do not think that it is as black and white as people think—that finance is evil. It is because people are sometimes evil, sometimes good but we have to have a system that allows them to do things on their own.

Some of them are going to get in trouble and some of them are going to do bad things. But if we work on improving the system, it will be more of a force for good in the future.

IMF Survey online: Your book also refers to the need for more policies that encourage philanthropy and protect against the concentration of too much economic power. Some argue that this amounts to wealth redistribution and goes against their idea of capitalism. What would you respond to that?

Shiller: I think philanthropy is essential to capitalism because it produces huge fortunes for some people, and they have to give some away because they cannot consume it.

You can only drive one car at a time. You can only sleep in one house at a time. If you own twenty houses, you are going to have to live between them. I think that if you are thoughtful about your career and you make a lot of money, you should give it away. That should really be part of our culture.

IMF Survey online: Are you optimistic that finance will lead to the good society?

Shiller: I think it has been amazing what finance has done. It has created wealth around the world.

This half century will be the half century when people in poverty all over the world —not everywhere I suppose—but much of the worldwill come into modern civilization, where they have good health care, good education, opportunities to travel and be part of the modern world.

This is amazing and it is because of financial modernization. We have to continue that.


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