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The New Financial Order: Risk in the 21st Century Hardcover – April 2, 2003

3.8 out of 5 stars 26 customer reviews

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Editorial Reviews

From Publishers Weekly

Shiller is best known for arguing, as he did in Irrational Exuberance, that stock market movements do not reflect underlying economic reality and that the volatility of the market makes the financial system unstable. It is therefore a surprise to find him advocating vast expansion of financial derivative markets to reduce the economic risk faced by individuals and countries. According to Shiller, governments should swap 10% or more of their gross domestic product with other countries and administer income swaps among entire generations. Individuals should manage risk by trading in new financial instruments based on the lifetime income of their profession, the value of homes in their area or economic statistics like the unemployment rate or inflation rate. Money, he says, will be replaced by "indexed units of account" tied to things like wage rates and commodity prices. People will carry transponders to report on their every activity, with the results stored in "global risk information databases," containing all personal information, including genetic data but protected against unauthorized access. In this way, the government can eliminate the underground economy and tax evasion and individuals will enjoy more economic security. The author admits people don't think they want this additional security, but he advocates "psychological framing" to change their viewpoint. The book is certain to be controversial. Some will see a visionary, high-tech combination of the best of capitalism and socialism. Others will be reminded of Brave New World and 1984, with privacy, freedom and adventure traded for a totalitarian mediocrity founded on constant monitoring and propaganda.
Copyright 2003 Reed Business Information, Inc.

From The New Yorker

Audaciously taking well-established economic ideas to their logical extreme, Shiller calls for a revolution in the management of risk, both individual and collective. While markets are currently used to hedge away a small number of risks—health problems, rising commodity prices, volatile currencies—Shiller believes that they could also limit risks like falling house prices and rising unemployment. In the future, countries might buy and sell futures contracts based on their own G.D.P., and individuals could insure themselves against choosing the wrong profession. There is a mad-scientist quality to some of these proposals, and the technical and political obstacles to their implementation seem insurmountable. Still, Shiller's ambition is exhilarating, and gives his work something that most business books lack: a deep sense of how economic ideas might transform people's everyday lives.
Copyright © 2005 The New Yorker --This text refers to the Paperback edition.

Product Details

  • Hardcover: 384 pages
  • Publisher: Princeton University Press (April 13, 2003)
  • Language: English
  • ISBN-10: 0691091722
  • ISBN-13: 978-0691091723
  • Product Dimensions: 9.5 x 6.5 x 1.2 inches
  • Shipping Weight: 1.5 pounds
  • Average Customer Review: 3.8 out of 5 stars  See all reviews (26 customer reviews)
  • Amazon Best Sellers Rank: #1,074,441 in Books (See Top 100 in Books)

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Customer Reviews

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Format: Hardcover Verified Purchase
In the last two decades fascinating developments and innovations have occurred in the field of finance. Now called financial engineering, the techniques used therein are dependent on highly sophisticated constructions in mathematics. Risk analysis has been a large part of this drive for innovation in finance, and is the subject of this book. The author proposes some "radical" innovations for risk management, and it is fascinating reading. Those who welcome new ideas and proposals in finance should find the book interesting, but the book is addressed to a non-technical general audience, and so most of the mathematical justification behind the ideas is left out. However, references are given for the author's work and others he has collaborated with for the reader who needs a more quantitative approach. There are some philosophical threads in the book that are somewhat troubling, for those who do not agree with the political and moral philosophy of John Rawls (who the author uses as a "foundation"), but the substance of his ideas can still be accepted even if this philosophy is explicity rejected.
The author proposes six ideas for what he calls a "new financial order": livelihood insurance, macro markets, income-linked loans, inequality insurance, intergenerational social security, and international agreements. He also proposes the development of massive databases, what he calls GRIDS, standing for "global risk information databases", in order to provide the information that allows effective risk management, and "indexed units of account", which is a new "electronic money" that serves to optimize the negotiating of risk.
All of part three of the book is devoted to these six ideas.
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Format: Hardcover
Bob Shiller, economics professor at Yale University, is a shoe-in for a Nobel Prize in Economics within a decade. The reason: capital markets are at the center of today's global world, and Bob Shiller, perhaps more than anyone, understands them.
Talk about timing! His previous book, Irrational Exuberance (echoing Fed Chair Alan Greenspan's famous 1996 phrase), hit the book stores in mid-March 2000 -- six days after the NASDAQ peaked at 5,100 and the new-economy bubble burst. In it he explained why misperception of risk and our abysmal mismanagement of it brought stock prices far above sustainable levels. Of course, he wrote that long before the rest of us (except for Alan Greenspan) started to lose sleep over it.
His new book appears, again perfectly timed, when most of us feel more insecure than ever. There is no argument that with globalization the world has become a riskier place. The same opportunity that let the hedge fund Long Term Capital Management speculate and arbitrage globally also threatened the entire world, when at one point its liabilities were said to approach 10% of America's annual GDP. I co-authored a case study of a leading investment bank that pioneered a new state-of-the-art approach to risk management (known as value-at-risk) -- and was bankrupted by it.
Have we learned our lesson? I doubt it. A popular Silicon Valley bumper sticker says: "Oh Lord -- please, just one more bubble". Based on history, the prayer will be answered -- there will be many more bubbles. And more economic crises, because every economic crisis in history began with financial collapse.
Economists are great at diagnosing problems, but generally poor at solving them.
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2 Comments 32 of 40 people found this helpful. Was this review helpful to you? Yes No Sending feedback...
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Format: Paperback
Shiller is a visionary economist. The problem with visionaries is that they do not always see the world the same way as everyone else.

This book outlines how Shiller believes a range of innovative risk management products could change the international financial system, and at the same time raise the living standards of ordinary people. Shiller wants to create derivative products which would allow people to use financial markets to hedge against loss of income, or the decline in the value of their house, for example.

Now this is pretty daunting stuff for the average reader, and I doubt that most of the people Shiller wants to help would fully appreciate the complexities of the things he advocates.

The other problem I have is that I simply don't believe all of Shiller's ideas are feasible. Moreover, even he would have to admit it is impossible to eliminate risk from life, yet that is what he tries to achieve.

I think it is a terrific book for those who want to ponder "what if." It can be a hard read though.
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Format: Hardcover Verified Purchase
This is a big, big book. Although it contains only 276 pages of commentary, its scope envisions a brave new world we can only imagine and argue about. No doubt the outcome of the argument will weigh heavily on our future for years to come. Professor Robert J. Shiller needs no introduction. Whether by intent or luck, his "Irrational Exuberance" warning about our overvalued stock market was published around the time NASDAQ topped out just above 5000 (March 2000). The rest is history. And while I, as a former member of two options exchanges, certainly welcome any suggestion to increase the trading opportunities available to us today, the six innovative financial instruments he proposes to reduce/share risk leave a lot to be explained, both mechanically and philosophically. The book, though, rates five stars for its thought-provoking ideas and for the stature that Shiller brings to them. There's a lot in this book and nothing in it should be discarded without extensive study and reflection. One of life's hardest lessons to accept is that none of us, either individually or collectively, can ignore the dynamic world we live in. Sitting still is not an option because of the relative motion of everyone else in the world. Our only choices are, in the immortal words of Lee Iacocca, "Lead, follow, or get out of the way." Today's informational databases were sure to evoke something like Shiller's ideas. It is useless to turn our heads because it will happen. Therefore the intent of this book should be exposed to the largest possible number of people because what we decide will determine how we spend the rest of our lives. On the surface, Dr. Shiller would be creating a Dr. Pangloss world, but the devil would be in the details.Read more ›
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