耶鲁大学金融市场英文文本financialmarketslecture24transcript

Financial Markets: Lecture 24 Transcript Professor Robert Shiller: This is, as I said, my last lecture for this course and Im entitling this lecture, The Democratization of Finance. I wanted to save this to the end because its really about looking at the broad purpose of our financial markets and our financial institutions. Ultimately, theres only one purpose to all of this and thats human welfare. Its people. This should be obvious, but lets not forget that corporations exist only for the benefit of people. Normally, we say for their owners, but we could also add other stakeholders. But, its people-individual people-that matter only, unless you want to add animals. We have non-profits that are aimed at animal welfare as well, so well include them. Ive made it a theme of my recent books that finance is a powerful tool for improving human welfare and in my latest two books I emphasize what I call the democratization of finance. Maybe I should write this down because its a term that I like to use-democratization of finance-or you could say for short, financial democracy, but I mean something a little different. In the 1930s, people talked about financial democracy as the shareholders voting for the direction of a corporation. I dont mean it-by that-by democratization of finance I mean bringing it to the people. Theres been a long trend towards democratization of finance that goes back centuries; that is, originally financial techniques were a value only to the very rich or the very sophisticated. In 1780, the President of Harvard College had his paycheck-I think it was President Lamont-indexed to inflation. Correction: It was President Samuel Langdon. Ive been trying to figure out if anyone else in the world had ever had a CPI indexed labor contract and Ive not been able to discover any other example. That was 1780. So, there was one person in the world who had an inflation index employment contract. Funny, who was it? It was the President of Harvard, so not a random person. As time goes by, we have more and more spread of these concepts. I make it as a mission in two of my books, New Financial Order, which is on reserve, and my new book, which Ill write here, Subprime Solution, which is not on reserve because I havent finished it yet, but it will be out in-it will be sometime this summer. It will be available in bookstores. Apparently, well-so, the theme is that-in both these books-is that a lot of our problems can be solved by extending-continuing this trend toward democratization of finance. We have problems with inequality-economic inequality. This is, I think, probably the most important issue facing advanced countries today-that is that we are not sharing income equally. There are a remarkable number of poor people and a small very elite group who are making hundreds of millions of dollars. In most countries of the world, inequality is getting worse. This applies both to the advanced countries like the United States and to the emerging countries like China and India. Its not altogether bad because part of the reason inequality is getting worse is that theyre suddenly getting rich people. If everyones getting better off, you could say, whats the problem? In many ways that is the right answer, but I think that we cant tolerate excessive inequality. The beauty of it is that the very same capitalism that has been generating inequality has solutions for it. Many of our venerable economic institutions that we already have are working against inequality, so Ill mention just for example life insurance. That helps alleviate inequality by eliminating one important cause of inequality. A lot of poor people, traditionally, are people whove lost-families that have lost one of the two parents, either the mother or the father. Of course, that puts the family in stress because they have just lost half of their adults. If you have life insurance, that solves that. Another source of inequality is solved by health insurance. An important cause of inequality is somebody gets sick, so they are unable to earn an income and they end up in disastrous economic situations. Another one is disability insurance. Disability insurance protects you against something like an accident that causes you to become unable to hold a job; that tends to be a lifetime thing. Disability insurance is a lifetime insurance contract; you pay for it while youre healthy. If you become disabled, you get support for the rest of your life. These are just some examples of how inequality is already being dealt with through risk management institutions and why finance-I always lump insurance in-these are all insurance, but I lump that in with finance as risk management and why theyre so important. We still see inequality getting worse, so I think that is a challenge toward improving risk management institutions. The subprime crisis that were in now is really substantially due to failures of our risk management institutions. Notably, we have had a failure to provide institutions to help people to diversify their own household portfolios. So, people who bought a house would have been in a highly leveraged position and vulnerable to risks of changes in home prices and to other risks. We need to go a lot further. Now, part of this theme of democratization of finance is that we have to pay respect to behavioral finance. Thats because people dont-especially the less educated or less capable people-dont always make optimal use of financial instruments like, for example, insurance. If people dont make use of risk management contracts, then we have a problem. What we have to do going forward in the future is design our risk management contracts to work better for real people. That requires what they call in the engineering department, human factors engineering, but Ill add financial. Financial engineering is a term sometimes used in a disparaging term for people who invent things that are just a bit too complicated. But usually, the word financial engineering is used approvingly to refer to peoples efforts to make finance work even better than before-to make progress in our financial institution. One of the themes of my-of this book and this book-is that we have a lot of progress to be made, but I think it has to be taking account of our better financial institutions-knowledge of financial theory and behavior. What I wanted to talk about-actually, this lecture-I have several parts. I wanted to talk first about social insurance, which is not normally covered in a finance course. It seems to be so relevant that I want to talk about it. Social insurance refers to government programs that insure people against risk. I wanted to talk about the extremely important risk management programs that the government has instituted. Im going to talk especially about bankruptcy and bailouts because theyre relevant right now, particularly relevant right now with the subprime crisis. Then I wanted to conclude this lecture with some thoughts about financial careers and about morality. I wanted-I talked about that in the first lecture. Maybe I should have talked more consistently about it. Young people are thinking about careers and I think that, ultimately, I give you credit for wondering about the moral purpose of different careers. I think finance has a somewhat tarnished reputation, but I think thats really undeserved. I guess people in finance get into controversial positions more so than people who are in other occupations that dont put them in these moral dilemmas and sometimes they can behave badly. I dont actually claim to have answers. You should take a philosophy course. I wont give you answers to all these ethical questions, but what I want to do is at least raise them and think a little bit about how they relate to this course. The first principle of-I want to come back now to what I said I would talk about-namely, the role of the government in risk management. I think it would be a mistake to ignore this because David Moss, who actually got his PhD in history from Yale and I talked to him when he was still here, wrote a book, When All Else Fails. It was a history of risk management in the U.S. This is about ten years ago this book came-or eight years-I forget exactly, sometime in the last decade. David A. Moss, When All Else Fails: Government as the Ultimate Risk Manager, Cambridge: Harvard University Press, 2002. He makes the argument that really every government-he focuses on the U.S., but every government has a risk management role. Much of what governments do is to do risk management, especially modern governments. That wasnt maybe true so much before, before the end of the nineteenth century. The governments have gotten in increasingly into risk management. The first example I would give is the progressive income tax or graduated income tax, as it was called by Adam Smith in 1776, in his book, The Wealth of Nations. He said that maybe we should have a tax on incomes and the tax on incomes should be graduated so that people with higher incomes pay a higher fraction of their income and that would help reduce inequality. Smith, although he raised it in that famous book in 1776, he then quickly dismissed it as unworkable. He said, if we had an income tax it would be, quote, “a tax on conscience,“ meaning that only the honest people would pay it because it was impossible to verify anyones income; income is too complicated to measure. Maybe he was right. The first income tax-it was either the UK or Holland at the end of the eighteenth century. They had small income taxes and they were progressive, but they were a beginning. The U.S. experimented with an income tax in the 1860s and abandoned it. The original experiments were all only marginally successful, but the U.S. finally got an income tax in 1913 and at a very low level, but this is the U.S. It ultimately became very important. After World War II, the top marginal tax bracket rose above 90%, so it became a very significant redistributor of income. Ultimately, its gone way back down now; weve reversed it, but ultimately its a risk management device. What it means is that if you do very poorly, you dont pay any taxes and you get benefits. We also-I might add to it-we have a progressive income tax that finances education for everyone-universal education and other social services and public goods. So, that is a risk management device and it works despite limitations of human behavior because its automatic; its imposed on you, so nobody can forget about it. It becomes a universal risk management device. In some sense, its the most important risk management device of all because it deals at the very low level. Starting in around the-well, I guess you could go back to Milton Friedman, who was a conservative economist who started advocating a negative income tax in the 1940s. He actually, in his 1963 book, Capitalism and Freedom, he advocated it more strongly. Thats the usual source-that we should have a negative tax on low-income people to bring their income up to a good substantial level; so, that was the negative income tax. It sounded like a very negative tax on low income; it sounded like a very controversial crazy idea when he launched it, but crazy ideas have a way of eventually becoming standard. The United States adopted-and it is now fairly significant-something called the Earned Income Tax Credit, which is a negative income tax for low-income families. It emerged from thinking-EITC-Earned Income Tax Credit. If you are a family with children with income very low, like under $10,000, youll get a substantial negative tax-several thousand dollars-and that is risk management. It means that anybody whose income falls below very low is-its kind of like an income insurance scheme run by the government. The concern about all of these schemes, however, is moral hazard. If you have an earned income taxed credit-its kind of designed around moral hazard. Instead of having welfare, welfare is a less-thats just a gift to someone who doesnt have any job at all, who has no income. Then, that moral welfare tends to lead to a moral hazard problem. If the government says, if you dont have a job well support you, that encourages people to say, okay I dont have a job. But, the earned income tax credit is different because its a negative tax rate on your income. You have to have income in order to get anything, so you have to get a job to get EITC. The more you earn, the more EITC, up to a limit for low levels of income-the more negative tax you get. The thing that were-what were doing as time goes by is were getting a clearer picture of how to design risk management contracts for the general public. The EITC was invented in the 70s in the U.S.; it was sponsored by Senator Russell Long. It is now being copied around the world; although, I guess there were earlier antecedents, but the U.S. was the first country to do EITC. The other-I wanted just to remind you of the different kinds of risk management that the government offers. One important part of it is Social Security. I want to go back to the original Social Security system; it was in Germany under Otto Von Bismarck that the first Social Security systems were developed. It was considered a highly radical idea in the 1880s when-Ill put this down in German, in case some of you can understand this-1883 Krankenversicherung. Health insurance was founded nationally in Germany, so it was a government mandatory program; everybody in Germany had to contribute to health insurance. German words are very long; they run them together; I ran out of room to write Krankenversicherung. In 1884, Unfallversicherung-unfall means accident, like a fall; Versicherung means insurance. The government created an accident referring to workplace accident insurance and it was-the German government had it-it was an arrangement that made it mandatory for employers to buy insurance against injuries to people who worked there. Then they had in 1889 Altersversicherung. This isnt supposed to be a German lesson, but I like to put it this way because it suggests its origin. This was old age insurance; alter means old. So, old age insurance was generated for the whole country of Germany and, at this point in 1889, Germany was the only country to have a social insurance program. Shortly after the turn of the century, Lloyd George, who was Prime Minister of the UK, traveled to Germany and looked at their system and was very much impressed and thought-he said one thing he noticed about Germany, there are no beggars. Normally, in London you couldnt walk down the street without seeing somebody who was sitting there holding out a tin cup who had no legs or mothers with children who were orphans. He said, its gone in Germany. So, he became convinced that the UK should follow the lead. This was copied over the whole word and its virtually everywhere now. Some less developed countries havent gotten there yet, but this is where theyre going. I wanted to quote Gustav Schmoller, who is a German economist in the 1880s. In the early twentieth century, he wrote some memoirs about his life and the life of other economists in Germany. He said “The triumph of insurance in every imaginable area was one of the centurys, meaning the nineteenth centurys great advances in social progress. It was an entirely logical development that insurance should spread from the upper classes to the lower classes; that it had to attempt as far as possible, to eliminate poverty and that the older charitable relief funds for the workers were more and more constructed on the sound principle of insurance.“ Gustav Schmoller, Charakterbilder, Leipzig, Verlag von Duncker, 1913, p. 57 (Shillers translation).The problem with charity is that it tends to be whimsical and capricious. If youre relying on charity to resolve problems of poverty, its going to be applied very unevenly and it would be salient examples of poverty. Like, if a child is suddenly stricken with some unusual illness and it gets written up in the newspapers, then generous contributions would come pouring into that child, but other children who are not so blessed get nothing. In the United States, we were about the last country to jump onto the bandwagon, begun in Germany-partly I guess because the U.S. is more free enterprise in its orientation. Maybe it doesnt like to adopt ideas from Europe. It wasnt until the Great Depression that the U.S. adopted Altersversicherung and we still havent adopted Krankenversicherung; we still dont have a national health insurance. We have Medicare and Medicaid, but they dont apply to everyone. We have about forty million uninsured Americans with no health insurance, so were still not there yet; maybe well get there. I wanted to talk about some of the important successes that-the Social Security System in the U.S. is our copy of the German system. Social Security started in 1935-that was about fifty years after the Germans invented it. Its remarkable how similar the idea that we have done is and it stays-we really have something like the 1889 German system in place today. What it did is it created a system of contributions to-right now, when you get a job, you have to pay 6.2%-thats on your pay stub. 6.2% is taken out as your contribution to Social Security and then your employer pays another 6.2%. So, 12.4% of your income goes to Social Security and those are thought of as contributions to an insurance scheme for your-it has three components. Its called OASDI; OA stands for old age, S stands for survivors, and DI stands for disability insurance. Well, theyre all insurance. You are-its mandatory; you are paying a lot into this system. Youre paying-the fact that your employer pays half of it is perhaps misleading, so its really like 12% of you