Big Finance’s Best Friend: The Wall Street Apologetics of Robert Shiller

Pasquale_37.5_shillerFrank Pasquale reviews Robert Shiller's Finance and the Good Society, in Boston Review (the book's introduction can be found here):

Shiller brims with ideas for redirecting financial ingenuity to real-world problems. For instance, he endorses “social policy bonds,” which would allow governments to raise money while encouraging entrepreneurs to find creative ways to meet public goals. (The bonds would pay out more than a baseline return if the bond purchaser, say, reduced recidivism among a set of prisoners.) He believes that “even the most personal problems” can benefit from a financial engineer’s precision, since “finding a match between husband and wife is like finding a trade in a financial market.” For Shiller, whether in love or money, quants do it better.

His ambitions soar beyond the pragmatic into the panegyric. “Some of our greatest human achievements have their origins in . . . self promotion and the acquisition of wealth,” he reminds us. He praises the aesthetics of finance—the elegance of its theorems, and the beauty in “what it creates.” Contemplating how finance “facilitates all the day-to-day activities that constitute our working lives,” Shiller is so moved that he quotes Whitman’s “Song for Occupations”: “In the labor of engines and trades and the labor of fields I find the developments, / And find the eternal meanings.” He believes that leading CEOs and bankers share important similarities with poets, artists, and philosophers, whose vision can shape a “good society.”

What exactly do the creative geniuses of finance contribute? Shiller takes for granted that most financiers play a constructive role in the economy. For example, consider his discussion of finance’s share of GDP. He reports “the gross value added by financial corporate business was 9.1 percent of U.S. GDP in 2010.” But why not say that some firms “extracted” value, rather than “added” it? Think back to the last time you were charged a late fee on a credit card by a bank that already takes a cut of every purchase you make. Or the endless series of fees involved in a mortgage transaction, or the oft-mysterious charges that eat away at 401(k) accounts. How much value are the professionals pocketing these fees really creating, and how much of their role is explained by arcane law or custom, by their leverage over their debtors, or by their bosses’ power over networks of financial transfers?

Shiller endorses mild consumer-protection remedies for some of these practices. But he never seriously examines how much of bankers’ pay comes from skimming exorbitant fees off of normal economic activity, front-running, accounting shenanigans, and the like. He is untroubled by the fact that financiers as a class are so much better compensated than, say, scientists, let alone poets and philosophers. A Ph.D. cancer researcher with ten years of experience tends to make about $110,000 to $160,000 annually; a banker specializing in mergers and acquisitions, about $2 million. Top hedge fund managers make billions of dollars annually. The disparity fails to rankle Shiller, since the “scientists are mostly living comfortably doing what they really want to do.”