Yale’s Shiller Defends Goldman Sachs, Praises Finance: Books

The book jacket of ``Finance and the Good Society'' by Robert J. Shiller. Source: Princeton University Press via Bloomberg

If he hasn’t already done so, Lloyd Blankfein should dash off a thank-you note to Robert Shiller.

What other Ivy League economist would have dared, amid the sound and fury over Goldman Sachs Group Inc. in recent years, to stick his neck out by publishing a book that says finance is good and Goldman has no incentive to be deliberately evil?

Yet that is what the influential Yale University professor does in “Finance and the Good Society,” a provocative primer on how financial capitalism promotes prosperity.

“People think that the wealthy in our society -- among them the financiers -- have a real and genuine incentive to use devious means to attack and subjugate, economically, the majority of the population,” he writes. This is “an illusion,” he says.

It’s wrong to assume, he says, that Goldman executives -- whatever their misbehavior may have been -- were deliberately double-dealing when they created the Abacus 2007-AC1 synthetic collateralized debt obligation for John Paulson’s hedge fund.

Shiller is no apologist for the sins of Wall Street. He wrote the book before Greg Smith, a departing Goldman employee, publicly criticized the bank’s “toxic” culture and callous talk of ripping off its clients, a.k.a. the “Muppets.” Yet even now Shiller is right to remind us that society may suffer from the notion that every banker is a “bankster.”

‘Aggressive and Evil’?

“The assumption today,” he says, “often seems to be that businesses have a real incentive to behave in an aggressive and evil manner.” This belief, left to fester, will breed resentment and slow the spread of prosperity, he writes.

Finance, however flawed, has long been a force for good -- a powerful tool for building a richer, more equitable society, Shiller argues: Though financial innovation has gotten a bad rap from toxic CDOs, it has also brought us fire insurance, amortizing mortgages and equities we can purchase without fear of being sued for the companies’ transgressions.

Shiller isn’t excusing the excesses that tainted finance during the U.S. housing boom and bust -- the great bonus bubble, the explosion of household debt to $14 trillion in 2007, the government bailouts of wealthy bankers, and the wave of foreclosures.

Financial capitalism is like nature, he argues: “For all its beauty, it produces ugly things as well.”

He ought to know. Shiller has previously written about speculative bubbles, in “Irrational Exuberance,” and the housing meltdown, in “The Subprime Solution,” playing to his strength as the co-creator of the Standard & Poor’s/Case-Shiller Home Price Indices. The worst of the crisis, he says, may not be over.

‘Democratizing’ Finance

However ugly things get, Shiller remains convinced that the cure for what ails society lies in more financial innovation, not less. We need to harness finance for the greater good -- to “democratize” it by extending its blessings to more people.

Financial engineers should create safer products that promote the public good, Shiller says. He has proposed, for example, “continuous-workout mortgages,” which would automatically adjust a homeowner’s payments should housing prices fall or the economy contract.

Government pensions, meanwhile, could be indexed to the nation’s gross domestic product, an indicator of what taxpayers can actually afford to pay.

Shiller says he began writing this book for students in his finance class. Though the project took on a larger purpose, the final text is a curious hybrid.

Peacekeeping Bankers

In Part One, he summarizes the roles and responsibilities of financial professionals, job by job -- from chief executives to central bankers.

Bending over backward to show that all play vital parts in a healthy economy, he risks falling into naivete. Investment bankers resemble “diplomats negotiating an understanding between contentious powers,” he says; they are “keepers of the peace and promoters of progress.”

The book becomes far more engaging in Part Two, which explores the dysfunctions of financial capitalism and how we might cure them. Here, we get a smorgasbord of facts, trends and ideas.

Shiller reminds us of how the artist Jeff Koons started out as a commodities broker. He explores the design of casinos. He even explains why the evolution of the human brain makes us prone to asset bubbles. (We’re vulnerable to “thought viruses” that spread, like swine flu, across the globe.)

Pragmatic Visionary

In this section of the book, Shiller comes across as pragmatic as well as visionary, explaining how much financial capitalism has done for society and how much more it could do if harnessed for the common good.

“We are easily dazzled today by advances in information technology,” he writes. “But the advances in our economic institutions may ultimately be more important than those in our hardware and software.”

That’s a comforting thought for us Muppets, even if we’re feeling like Oscar the Grouch.

“Finance and the Good Society” is from Princeton University Press (288 pages, $24.95, 16.95 pounds). To buy this book in North America, click here.

(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)

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