The New Financial Order: Risk in the 21st Century

The New Financial Order: Risk in the 21st Century

Robert J. Shiller

Language: English

Pages: 384

ISBN: 0691120110

Format: PDF / Kindle (mobi) / ePub


In his best-selling Irrational Exuberance, Robert Shiller cautioned that society's obsession with the stock market was fueling the volatility that has since made a roller coaster of the financial system. Less noted was Shiller's admonition that our infatuation with the stock market distracts us from more durable economic prospects. These lie in the hidden potential of real assets, such as income from our livelihoods and homes. But these ''ordinary riches,'' so fundamental to our well-being, are increasingly exposed to the pervasive risks of a rapidly changing global economy. This compelling and important new book presents a fresh vision for hedging risk and securing our economic future.

Shiller describes six fundamental ideas for using modern information technology and advanced financial theory to temper basic risks that have been ignored by risk management institutions--risks to the value of our jobs and our homes, to the vitality of our communities, and to the very stability of national economies. Informed by a comprehensive risk information database, this new financial order would include global markets for trading risks and exploiting myriad new financial opportunities, from inequality insurance to intergenerational social security. Just as developments in insuring risks to life, health, and catastrophe have given us a quality of life unimaginable a century ago, so Shiller's plan for securing crucial assets promises to substantially enrich our condition.

Once again providing an enormous service, Shiller gives us a powerful means to convert our ordinary riches into a level of economic security, equity, and growth never before seen. And once again, what Robert Shiller says should be read and heeded by anyone with a stake in the economy.

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engineering of a risk management device. That is, they take into account how people might think, and how they feel observed by others. They do not rely on any government institutions, which at the time of their creation were generally incapable of dealing reliably with individuals’ incomes and obligations. The fraction of income given away is only 10 percent, a level low enough, and far below the 50 percent level that income taxes often reach today, that compliance based on purely moral

well above the minimum wage. Since she had no children to care for and no health problems, it would seem that she should have been able to get by all right. On the contrary, she discovered that she could hardly afford to live in-doors on a full-time income. Even some of the most Spartan mobile homes in the worst neighborhoods were often beyond her reach. She learned that working two jobs left her exhausted, and she marveled at the courage of the people who live such lives year in and year out. In

would have to be designed correctly. It would have to insure him against the actual loss of income, properly measured, that young people who choose a career in biotechnology will incur years later. What are these costs? If this field of biotechnology turns out to be a bad choice, years later, the costs could be high. He might have to learn a different field, perhaps in a different branch of biology. In this event, he may lose the advantage of his youthful years; he may no longer be free of

measures inequality. If all households were equal in terms of after-tax incomes, the curve would be a straight line between 0 percent and 100 percent: the bottom 30 percent of house-holds would receive 30 percent of the income and the bottom 50 percent of households would receive 50 percent of the income, and so on. But if households are unequal, the curve connecting zero and 100 would sag below this straight line. The more unequal are after-tax incomes, the more drastically the after-tax Lorenz

principle, not to enter a mortgage contract that entailed their automatically going deeper into debt for a while, deeper in terms of currency, even if their real inflation-corrected debt steadily declined.12 Money illusion apparently affected even these experts. Home prices were relatively quite low in many cities in 1981 because of this problem with mortgages. The subsequent rapid home price increases in many cities around the world in the 1980s was the result of the sharp decline in worldwide

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