The New Financial Order: Risk in the 21st Century

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.

Changes in a nation's economy and the unknowable effects of technological advances are two long-term, systemic risks we all face. By comparison, the risk to an investor's wealth of a company's stock missing its projected quarterly earnings is small in measure to the seismic shifts in the net worth of a much broader base of homeowner stakeholders. Now, if the stock market is not an adequate proxy for the overall wealth of the economy, then why not create "macro markets" for securities that swap out the risk of one nation's aggregrate output (GDP) for another's. Some will argue that the stock markets in the U.S. and other developed countries are already proxies for their economic prospects. But given the thin liquidity and relative immaturity of many other markets, securities tied to a more fundamental metric such as GDP or all real estate values are a clear positive.

Shiller does a good job of suggesting the challenges government and the private sector will confront to implement a new risk infrastructure. There is an interesting anecdotal history in Part Five of how various financial and insurance plans came into being as with our social security system modeled after the German system in the 1880's. The development of sophisticated "global risk information databases (GRIDS)" will provide a resource for writing appropriate contracts in the future. Privacy advocates will shudder, but part of the point is that the ways we control risk have evolved over time and can be modified to work better. This is a provocative book because of the wealth of its vision. With this much innovative thinking it seems reasonable that additional studies will build on Shiller's work and pave the way for some of these ideas to be adopted.


Thinking Outside the Box   July 31, 2003
N N Taleb
13 out of 19 found this review helpful

Robert Shiller has the remarkable ability to think independently and the courage to propose ideas that to middlebrow thinkers may sound speculative.
Think of what your reaction would have been had someone discussed risk sharing (insurance) before it became popular. A lunacy people would have thought. Most risk management is like that: we think backwards with the benefit of past history and find these ideas obvious. They were not at the time.
Throughout his career Shiller stood for unpopular ideas and was proven right (his 1981 paper on volatility, his 2000 discussion of the bubble). I would read and re-read this book.


Controlling Risk - A New Matrix   May 23, 2003
dennis wentraub (schenectady, new york USA)
2 out of 3 found this review helpful

The NEW FINANCIAL ORDER outlines an ambitious plan for reworking the ways we control financial risk. Shiller "democratizes" the subject of risk by addressing, among other things, the vulnerability of "ordinary riches" like the value of our homes and our choice-of-career incomes. These risks are various, unpredictable, and unevenly distributed through time and geography. That unevenness (unfairness, Shiller might say) means the risks can be insured, securitized, and traded. The moral dimension to this is Shiller's intention to hedge inequality that is "gratuitous, random, and painful".

Changes in a nation's economy and the unknowable effects of technological advances are two long-term, systemic risks we all face. By comparison, the risk to an investor's wealth of a company's stock missing its projected quarterly earnings is small in measure to the seismic shifts in the net worth of a much broader base of homeowner stakeholders. Now, if the stock market is not an adequate proxy for the overall wealth of the economy, then why not create "macro markets" for securities that swap out the risk of one nation's aggregrate output (GDP) for another's. Some will argue that the stock markets in the U.S. and other developed countries are already proxies for their economic prospects. But given the thin liquidity and relative immaturity of many other markets, securities tied to a more fundamental metric such as GDP or all real estate values are a clear positive.

Shiller does a good job of suggesting the challenges government and the private sector will confront to implement a new risk infrastructure. There is an interesting anecdotal history in Part Five of how various financial and insurance plans came into being as with our social security system modeled after the German system in the 1880's. The development of sophisticated "global risk information databases (GRIDS)" will provide a resource for writing appropriate contracts in the future. Privacy advocates will shudder, but part of the point is that the ways we control risk have evolved over time and can be modified to work better. This is a provocative book because of the wealth of its vision. With this much innovative thinking it seems reasonable that additional studies will build on Shiller's work and pave the way for some of these ideas to be adopted.