Robert Shiller's Impossible Dream

To dream the impossible dream
To fight the unbeatable foe
To bear with unbearable sorrow
To run where the brave dare not go...

This is my quest
To follow that star
No matter how hopeless
No matter how far
   — The Impossible Dream, from Man of La Mancha (Don Quixote)

Yale economist Robert Shiller, co-developer of the Case-Shiller Home Price Index and co-author of Animal Spirits, has an impossible dream. He described this reverie to the Daily Ticker's Aaron Task in Financial Capitalism Is “Taking Over the World”… and That’s a Good Thing.

In his latest book, Finance and the Good Society, Yale Professor Robert Shiller takes a view that runs contrary to the popular (and populist) wisdom these days: Wall Street is good for society.

"This time in history will be remembered as a time financial capitalism took over the world," Shiller says. "A time when emerging countries became developed. The plan we're on is going to yield a remarkable world in the future. It's really about finance."

According to Shiller, no nation can truly prosper without modern financial institutions. Furthermore, "we have to think the financial institutions we have today are part of a long historic progress to a better world, a better civilization."

Given all that's transpired since the crisis of 2008 — huge payouts for executives at faltering banks, taxpayer-funded bailouts and a slow recovery from deep recession — it's fair to say Shiller is in the minority on this, at least among those willing to speak publicly.

But Shiller is no apologist for Wall Street excess and understands the Occupy Wall Street movement arose, in part, because of a sense "people in the financial community lost [their] morality."

To combat this "race to the bottom," he is for a robust regulatory regime, both by the government and by the industry. "Ultimately you have to have morals and principles. You want it to be a good clean game," Shiller says. "Regulation is part of the picture."

Shiller's latest book provides some guidelines for this, as well as what he calls "a bunch of ideas" to democratize finance, by which he means "expanding it so this powerful technology accrues to the benefit of everyone, not just the minority."

It is a beautiful story, the standard story of why we need Big Finance. It's a "can't live with them, can't live without them" story. Why is Shiller's vision an impossible dream, an hallucination?

Economist Steve Keen once said of bankers that we need to put them back in their cages. Quite obviously they have gotten loose. The genie is out of the bottle. Pandora's box is open. Shiller's dream is to put the genie back in the bottle. Outside the bottle, Big Finance is predatory, not salutary.

The only thing which could overthrow the power of the bankers, including central bankers, is a people's revolution. But where would such a movement come from? The scope of financial power is global outside of communist China and a few oil exporters. The European Union is run by bankers, as recent moves in Greece and Italy demonstrate. The U.S. Treasury is run by Timothy Geithner, former head of the New York Fed and Obama's most trusted economic adviser.

Everywhere we look, bankers exert great influence on the political goals of nations. In this sense, the bankers are indistinguishable from those who would regulate them. This has been made obvious time and time again since the bailouts of 2008. The bailouts did not "save the world" as advertised so much as they preserved a corrupt status quo. The common man dreams of wealth. The banker dreams of debt.

Inordinate power in finance begets great wealth inequality. Deals are consummated behind closed doors, and the sole motive is profit. If some benefits should trickle down to the "little people" who live far down the line, that was only a happy accident. The workings of Adam Smith's "invisible hand" are increasingly harder to discern. Big Finance set free from reasonable constraints on its behavior is among the most undemocratic of human institutions. In addition to great power and wealth, it is exclusivity which defines the banking world. To paraphrase George Carlin, it's a big club and we're not in it.

This is how things stand early in the 21st century. This time in history will be remembered as a time financial capitalism took over the world, Shiller said. And I agree, in the sense just described. That's the problem, not the solution. Debt creation no longer equals wealth creation as it did for most of the 20th century. But Shiller, being a right-thinking, mainstream economist, sees the rise of Big Finance as enabling a great trickle-down to heretofore economically oppressed citizens in "emerging" economies like Brazil, India and China as if this were 1955 in the United States or 1975 in Japan. Is that what the future really looks like?

Well, no. The future is not my subject today so I won't get into it, but there are limits to growth which economists can't and won't acknowledge because those limits lie outside their mental models of how the world works. So every part of Shiller's story is a fantasy, from the democratization of finance to the enormous benefits which will accrue to all the "little people" from applications of this "powerful technology" (as Shiller puts it).

Robert Shiller is basically a good guy with a hopelessly naive view of the world. That's not terribly surprising in so far as he's an academic economist. So is Paul Krugman. So is James Galbraith. There are lots of them. And what do all these people have in common? Their quest is to follow that star, no matter how hopeless, no matter how far.

 

Bonus Video — The Impossible Dream, Frank's version

 

Comments

[John D]

I think MLK Jr put it best: I have a dream. That no man be judged by the color of his skin, but instead by the content of his bank account... Free QE, Free QE; Thank God Almighty, Free QE'. I'm starting to get all weepy thinking about it.