The New Financial Order: Risk in the 21st Century (Hardcover)

~ (Author) "VISUALIZING THE MAJOR economic risks of the future is difficult..." (more)
Key Phrases: livelihood insurance policies, radical financial innovation, intergenerational social security, United States, World War, New York (more...)

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.

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Product Details

• Hardcover: 384 pages
• Publisher: Princeton University Press (April 2, 2003)
• Language: English
• ISBN-10: 0691091722
• ISBN-13: 978-0691091723
• Product Dimensions: 9.5 x 6.6 x 1.2 inches
• Shipping Weight: 1.5 pounds
• Average Customer Review: 3.4 out of 5 stars  See all reviews (21 customer reviews)
• Amazon.com Sales Rank: #802,747 in Books (See Bestsellers in Books)

Customer Reviews

Most Helpful Customer Reviews

25 of 29 people found the following review helpful:

3.0 out of 5 stars Real People, Real Markets, Real Ideas, May 5, 2003

By	Shlomo Maital (Haifa, ISRAEL) - See all my reviews

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. But in The New Financial Order, Shiller offers a brilliant solution to our dismal inability to deal with risk and uncertainty, written in a style ordinary people can understand. His book is about "applying risk management technology to the major problems of our lives". In the words of his publisher Peter Dougherty, this is economics that tries to improve the culture. Here is Shiller's basic argument.

In the 1980's economic theorists played with an idea known as 'missing markets' -- the notion that if only there were markets for everything, including every kind of risk, we would all be far better off and the economy would function smoothly. In inventing the 'missing markets', people who hate risk find those willing to bear it, at an appropriate price. The mechanism of supply and demand finds that price of risk-bearing (insurance) that makes both risk-buyer and risk-seller happy and better off. But despite the boom in derivatives -- the market for a variety of exotic risk-bearing assets -- most of the risks ordinary people encounter cannot be insured.

Consider Joseph Q. Public. Joe wanted to study philosophy in college, but his mother persuaded him to became a mechanical engineer instead, because as a philosopher he might not make a living. He owns a three-bedroom Colonial in suburban Newton, MA., but worries its value will decline. He works for a small quality-assurance company and worries, in this global downturn, that he may soon be out of work. If he loses his job, he also loses his family's health insurance. All these risks are uninsured, because no such insurance exists; there are 'missing markets'. The irony is that, like a majority of Americans, Joe is heavily over-insured for the least worrisome or likely of all risks -- death. He has $700,000 worth of life insurance, even though, as a non-smoking 42-year-old who jogs, the chances he will die this year are less than one in five hundred -- far less than the chance of losing his job, picking the wrong career, or seeing his home equity tank.

How can Shiller's insights help Joe Public and the world in general? By devising markets that insure risks that really matter -- markets big enough, so that risk is widely spread and broadly diversified, minimizing the chance any single risk-bearer will go broke. Such as livelihood insurance -- the chance I may not make a living. Home equity insurance -- the chance my house will drop in value. Income-linked loans -- contingent on my having enough income to pay them pack. Inequality insurance --insurance for the risk income inequality will create too many poor people. Intergenerational social security -- pooling risks held by different generations, some of them who work, some who are supported by those who work. And a huge database that supports these new markets, with new indexes and units of measurement that quantify the risks so they can be bought and sold and efficiently insured.

Even if only a few of these new markets for risk existed, Joe Public could sleep a lot more soundly. It is time for banks, insurance companies, governments and the World Bank to invent them.
People love to ask economists like Shiller, if you're so smart -- and understand capital markets so well -- why aren't you rich? And if you know the solutions, why don't you do something?
Well, in fact, he is! And he does. In 1991 Shiller and partners founded Case Shiller Weiss Inc., to facilitate devices to manage the risks to our homes. This is done by the Case Shiller Home Price Index, a repeat-sale home price index that enables people to insure against a fall in home values. The company was sold at a high but undisclosed price to Wisconsin financial services firm Fiserv in 2002. Shiller has now founded a second firm, Macro Securities Research LLC, to create new risk management vehicles.

As a pioneer in what is now known as 'behavioral finance' -- the application of psychology to understanding behavior in capital markets -- Shiller has a secret weapon, his wife Virginia, a child-clinical psychologist. I suspect he and I had the same experience -- discovering that our wives knew far more about economic behavior than we did, because while we studied equations and numbers, they worked with, and helped, real people, every day.

9 of 10 people found the following review helpful:

4.0 out of 5 stars A fascinating alternative view of the financial system, September 22, 2004

By	Bill O'Chee (Surfers Paradise, QLD Australia) - See all my reviews

This review is from: The New Financial Order: Risk in the 21st Century (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.

6 of 6 people found the following review helpful:

5.0 out of 5 stars A Must Read!, June 11, 2004

By	Rolf Dobelli "getAbstract.com" (Switzerland) - See all my reviews (TOP 50 REVIEWER)    (REAL NAME)

Economist Robert Shiller became a household name when he published his previous bestseller Irrational Exuberance just as the dot.com boom was peaking. In The New Financial Order, he capitalizes on his celebrity to put forward a thoughtful, detailed proposal for managing economic risks. This highly readable book portrays a future in which many serious individual financial risks are dispersed to savvy global investors, thanks to technology. Imagine violinists being able to insure their careers in addition to their Stradivarius instruments, developing countries securing generous loans from the first world by tying the repayment schedules to their future GDPs and a revamped tax system preventing the gap between rich and poor from widening. We suggest this book to risk-management professionals who want to step back and look at the big picture, as well as to anyone who has a stake in creating new financial products to meet twenty-first century needs.