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Diagnosing Finance’s Failures: From Economic Idealism to Lawyerly Realism by Frank Pasquale- A Review of Robert Shiller, Finance and the Good Society, Princeton University Press (2012)
Frank Pasquale reviews Robert Shiller’s award winning book, which was awarded by the Nobel Prize Committee one of three economics prizes.
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Finance’s failures have polarized intellectuals. In universities, technical experts churn out formidably mathematicized studies, even as their peers in political science, sociology, and even economics departments warn of the dire social consequences of what Susan Strange called “mad money.” The business press breathlessly chronicles tycoons’ dealmaking, while a critical finance blogosphere paints them as greedy buffoons and crooks. In politics, the fracture is even deeper. Libertarians attack rule after rule, besieging the technocrats who take on the Sisyphean task of regulation.
Robert Shiller’s Finance and the Good Society tries to bridge each of these divides. He believes finance’s quants have a social purpose. He chides greedy corporate titans, while earnestly reminding us of the good they can do. He also offers a balanced account of finance regulation, explaining where government intervention is essential, and why he believes the reach of Dodd-Frank often exceeds its grasp.
Had Shiller stopped there, Finance and the Good Society would be a worthy, if not terribly notable book: a Nobelist’s reflections on an ailing economy. However, by the end of the volume Shiller’s scholarly detachment curdles into complacency. He views the financial scandals of the past few years as freakish events, not as the natural consequence of a captured regulatory system. He also suggests that excessive suspicion toward Wall Street is a bigger threat to the economy than the wrongdoing of bankers.
1. Susan Strange, Mad Money (1998) (describing and critiquing increasingly deregulated financial markets).
2. Robert Shiller, Finance and the Good Society (2012).
When Shiller emphasizes the importance of trust to economic growth, he speaks with authority. He has eloquently analyzed the role of human psychology in markets, and he predicted both the tech and housing bubbles. He has been a methodological trailblazer, introducing behavioral science to the ossified academic discipline of finance. Time’s Michael Grunwald has called him a “must-read” among wonks in the Obama Administration. Shiller’s past books command respect and repay close reading. Given his sterling career, it is deeply disappointing to see Shiller divert the “behavioral turn” in economics into the apologetics of Finance and the Good Society. An inadvertent lesson of Finance and the Good Society is that even an open-minded economist can rationalize a corrupt status quo when he fails to closely examine the power dynamics of Wall Street. When frauds reach a critical mass—as they have in many leading financial institutions—the “sticks” of law enforcement must have at least as large a role as the “carrots” of economic incentives.
Admittedly, Shiller does offer an accessible and entertaining overview of contemporary finance. He describes the roles and responsibilities of key actors in the financial sector, ranging from CEOs to lawyers and lobbyists. Financial institutions are intermediaries, standing between parties who have money and parties who need money. But as Shiller is quick to explain, the quaint picture of intimate bonds between depositors and lenders in It’s a Wonderful Life is a far cry from today’s world of securitized lending. As financial institutions have become more specialized, so too have the instruments they use. Some, called derivatives, offer value “derived” from the price of reference assets. The complexity of these instruments is often limited only by the imagination of the parties to them.
Beyond such complexity, what exactly do the creative geniuses of finance contribute to society? 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? In the developing world, finance may be playing an even more extractive role. For example, in South Africa, rudimentary financial institutions “help” individuals save for funeral expenses by charging them to keep their money. Around the world, “payday lenders” may get rich by taking advantage of financial distress.
Shiller endorses mild consumer protection remedies for some of these sharp practices. But he never seriously examines how much of bankers’ pay comes from skimming, front running, and the like, and how much derives from genuinely productive activity. He is untroubled by the fact that financiers as a class are so much better compensated than, say, scientists (let alone poets and philosophers). To give one example: a Ph.D. cancer researcher with 10 years of experience tends to make about $110,000 to $160,000 annually; a banker specializing in mergers and acquisitions, about $2 million. The differential at the top of each field is orders of magnitude greater, with top hedge fund managers making billions of dollars annually. The disparity fails to rankle Shiller, since the “scientists are mostly living comfortably doing what they really want to do.”
Unless, of course, they’re one of the thousands of drug developers laid off by pharmaceutical firms, which have been pressured by Wall Street to focus on “core competencies” and cut R&D. Last year, investment managers punished Merck for investing in research, while rewarding Pfizer for cutting it dramatically. Investors and analysts also questioned R&D levels at Lilly and Amgen. The constant pressure for quarterly earnings makes each blow to our scientific infrastructure seem rational at the time, but its consequences are devastating in the long run. Antibiotic resistance is on the rise, and innovators routinely neglect the disease burden of the global poor.
Shiller seems to believe that finance is part of the solution here because two researchers have proposed that governments should “promise to buy and distribute for
Id. at 12.
Danielle Kucera and Christine Harper, Traders’ Smaller Bonuses Still Top Pay for Brain Surgeons, 4-Star Generals, BLOOMBERG (Jan. 13, 2011, 10:57 AM), http://www.bloomberg.com/news/2011-01-13/traders-smaller-bonuses-still-top-pay-for-brain-surgeons-4-star-generals.html.
Shiller, supra note 2, at 190.
free drugs for major diseases, thereby creating market forces to motivate private enterprise to find drugs that would cure the diseases.” He conveniently ignores how brutally market forces have diverted research away from neglected tropical diseases in the first place. He also fails to reconcile his spending plans with Wall Street’s constant pressure for lower taxes.
Shiller is eager to praise financiers for funding innovation, but barely mentions the asset-stripping and short-term thinking that have devastated many industries over the past two decades. A study from the New Economics Foundation recently estimated that leading London bankers “destroy £7 of social value for every pound in value they generate.” In the U.S., the Kauffman Foundation concluded that an “expanding financial sector” is “depleting [the] pool of potential high growth company founders.” Whatever one thinks of their methods, at least the NEF and Kauffman are asking tough questions about finance’s role in our economy. Shiller does not even pose them.
Shiller occasionally acknowledges that there are deceptive derivatives traders, or dishonest investment bankers. But these are always waved away as deviants who betrayed institutional values. We’re all in it together, and ordinary investors shouldn’t let a few bad apples turn them off to modern finance generally. Moreover, in Shiller’s view, too much negativity could hurt the markets, and isn’t justified by the facts.
He disapprovingly notes that:
[P]eople widely assume that Countrywide Financial deliberately issued and securitized mortgages that they believed would ultimately default. . . . There may well have been some moral lapses behind these events, but it is not correct to claim that [Countrywide] acted deliberately in full knowledge of the actual
6. Id. at 71.
7. See Frank Pasquale, Joining or Changing the Conversation, 29 CARDOZO ARTS & ENTERTAINMENT LAW JOURNAL 681, 692 (2011).
8. Eilís Lawlor, Helen Kersley & Susan Steed, A Bit Rich: Calculating the Real Value to Society of Different Professions, THE NEW ECON. FOUND. (Dec. 14, 2009), http://www.neweconomics.org/publications/bit-rich.
9. Ben Branham & Barbara Pruitt, The Cannibalization of Entrepreneurship in America: Expanding Financial Sector Depleting Pool of Potential High-Growth Company Founders, KAUFFMAN FOUND. (Mar. 25, 2011), http://www.kauffman.org/newsroom/expanding-financial-sector-depleting-pool-of-potential-high-growth-company-founders.aspx.
outcome. To the extent they misbehaved, it was not really in their ex ante interest to do so.
The argument is murky—who among us can act “deliberately in full knowledge of the actual outcome” of what we do? Shiller is surely right that Countrywide had no time machine that could magically transport its CEO and Board from 2005 to 2010. But the managers had plenty of warning about what could transpire.
Countrywide was a massive mortgage lender with a good reputation until the rise of subprime. To compete in that market, its CEO, Angelo Mozilo, adopted many of the tactics of subprime pioneers like Ameriquest, even though Mozilo had reported Ameriquest to Eliot Spitzer after he learned of its business practices from former employees. Mozilo himself wrote that, “In all my years in the business I have never seen a more toxic pr[o]duct” than the zero-down loans his company promoted.
Countrywide’s former Senior Vice President for Fraud Risk Management, Eileen Foster, has stated on 60 Minutes that the fraud at Countrywide appeared to her as “systemic” and “intentional.” After she complained to the mortgage lender’s Employee Relations Department, it investigated her.
Foster’s treatment was not an isolated case in the finance sector. Internal auditors routinely face obstruction and sabotage if they carry out their duties fully and honestly. “Fuck the compliance area – procedures, schmecedures,” stated the former president of Merrill Lynch Professional Clearing Corporation in a memorable email. In another case, a Merrill trader who refused to go along with dubious deals at that firm was sidelined and then unceremoniously fired. A would-be whistleblower, Richard Bowen at Citigroup, went from supervising 220 employees to supervising two after he expressed concerns about risks. Risk managers were also swept aside at Lehman. As
10. Shiller, supra note 2, at 220.
11. E-mail from Angelo Mozilo, CEO, Countrywide, to David Sambol, COO, Countrywide (Apr. 7, 2006).
12. Eileen Foster, Obama Administration Needs to Tap, Not Stiff-Arm, Wall Street Whistleblowers, ROLLINGSTONE.COM (Aug. 9, 2012, 11:20 AM), http://www.rollingstone.com/politics/blogs/national-affairs/the-obama-administration-needs-to-tap-not-stiff-arm-wall-street-whistleblowers-20120809.
Satyajit Das memorably put it in his book Traders, Guns, and Money, “no trader making $1 million + a year is going to take questions from an auditor making $50,000 a year.” Risk officers are often seen less as guardians of the firm’s integrity than as problem employees to be silenced or kept in the dark.
These power dynamics escape the notice of Shiller, who conceives of financial firms as peaceable kingdoms of traders, compliance officers, and managers. When Finance and the Good Society finally addresses “some unfortunate incentives to sleaziness inherent in finance,” one looks in vain for concrete discussion of actual financial scandals of the last decade. Instead, we are treated to perfunctory tour of casinos, “bucket shops,” tricky brokers, the neuroscience of hypocrisy, polygamy, and conspicuous consumption. The chapter almost reads as an extemporaneous effort to “run out the clock” on the sleaze issue without taking a stand that would offend any potential future employer of Shiller’s students.
Consider Shiller’s main messages about Goldman Sachs. First, he sees it as unfortunate that people may loathe the firm, because without investment bankers, we would not have securities markets. Second, he questions whether Goldman “deliberately double-dealed its clients,” saying only that they “allegedly” did so. Again, he appears utterly unfamiliar with reams of critical commentary on the firm. Former Goldman employee Greg Smith has said that, “It makes me ill how callously people talk about ripping their clients off” at the firm. He has described a pervasively corrupt culture that has also been skewered by others who worked there, like Nomi Prins and Alexis Goldstein.
Shiller might write them off as disgruntled former employees. But government investigations revealed numerous instances where Goldman withheld critical
13. Satyajit Das, Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives 144 (2006).
14. Shiller, supra note 2, at 159.
15. Id. at 159-167.
16. Id. at 220.
17. Greg Smith, Why I Am Leaving Goldman Sachs, N.Y. TIMES (Mar. 14, 2012), available at http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?pagewanted=all.
information about the securities it was selling. Everyone knows the excremental litany from the Goldman emails: "Boy that Timberwolf was one sh**ty deal," "How much of that sh**ty deal did you sell?" A Vice President at the firm bragged to his girlfriend, “[I] managed to sell a few abacus bonds to widow and orphans that I ran into at the airport.” These are not cherrypicked, out-of-context quotes. According to the bipartisan Levin-Coburn Report, “Goldman recommended [securities] to its clients without fully disclosing key information about those products, Goldman's own market views, or its adverse economic interests.” A hedge fund played a direct role in selecting the assets in the Abacus deal Shiller discusses. It was designed to fail, losing its investors’ money while triggering a “credit event” that would pay off handsomely once that happened.
Shiller would have us believe that regulation can deter misbehavior. In the Abacus case, the Securities and Exchange Commission ultimately filed civil charges against Goldman for failing to disclose Paulson’s role. The case settled for about $550 million. This may seem like a huge concession, but it was less than 5 percent of the $15.3 billion in compensation it paid out in 2010. The penalty is ultimately a slap on the wrist, barely affecting the outsized bonuses enjoyed by Goldman’s key employees.
Such outcomes have become the rule, not the exception, in contemporary banking regulation. Even the most egregious behavior, however much it hurts the firm responsible or the world at large, almost never results in jail time, direct financial losses, or even serious reputational damage for the individuals involved. What one finds instead is high demand for the “skills” involved in grabbing quick gains for oneself and one’s supervisors.
Shiller’s treatments of leading firms tend toward superficial affirmations disguised as contrarianism. His breezy, “look on the bright side” bonhomie would work fine as an after-dinner speech at the Kiwanis Club. But it’s embarrassing in comparison with
18. Carl Levin & Tom Coburn, S. Subcomm. Investigations, Comm. Homeland Sec. & Gov’tal Affairs, Rep. on Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (Apr. 13, 2011). Available at http://www.levin.senate.gov/imo/media/doc/supporting/2011/PSI_WallStreetCrisis_041311.pdf.
more rigorous rethinkings of the role of finance, ranging from the LSE’s Future of Finance Report, to the Kay Review, to Amar Bhide’s extremely insightful A Call for Judgment: Sensible Finance in a Dynamic Economy. And it is a shame to consider that Shiller’s work is probably getting more attention in the United States than those three works combined.
Given scant enforcement of relevant law, large financial institutions are increasingly untrustworthy. They no longer appear to be unitary “actors” at all, but rather shadowy and unstable ensembles of desks and divisions whose main goal is slipping by whatever bonus-maximizing scheme won’t set off alarms among risk managers and regulators. Given the compensation system in these firms, power is held by those who can make quick money in big deals. Whatever gains can be realized by year end can be passed through to top managers as bonuses, and are virtually never clawed back. As the New York Times has reported, in 2006, Merrill gave “$5 billion to $6 billion in bonuses,” but in the following two years, the firm lost over $20 billion. “What happened to their investments was of no interest to them, because they would already be paid,” said Paul Hodgson, a senior researcher at a shareholder activist group. CEOs like Angelo Mozilo and Dick Fuld still enjoy fortunes of hundreds of millions of dollars. This is the business Robert Shiller wants us to respect as an integral part of a “good society.”
Sometimes Finance and the Good Society borders on theodicy, explaining how benevolent finance redeems even the most disastrous aspects of capitalism. For example, he looks at the bright side of the BP oil spill—nearly all the risks were insured. The 5 million barrels of oil lost “may sound like a lot, but it is virtually inconsequential for the world as a whole;” “the world might run out of oil, say, a few days sooner a century hence.” For Shiller, “to the extent that all risks were insured properly….then there was no real and lasting suffering,” except of course for the initial
19. See Karen Ho, Liquidated: An Ethnography of Wall Street (2009)
20. Louise Story, On Wall Street, Bonuses, Not Profits, Were Real, N.Y. Times (Dec. 17, 2008), available at http://www.nytimes.com/2008/12/18/business/18pay.html?pagewanted=all.
21. Frank Pasquale, IBG: Foundation of American Finance Capitalism?, Concurring Opinions (Dec. 17, 2008, 9:20 PM), http://www.concurringopinions.com/archives/2008/12/ibg_foundation.html#c364701.
22. Id. at 65.
loss of life caused by the platform’s explosion. Instead, the costs were spread worldwide, absorbed by those who were paid premiums to freely take on the risk of paying for catastrophe. Compromised ecosystems, disrupted lives, countless hours of cleanup—all smoothed away by the mellifluous flow of properly allocated money.
The main purpose of the financial sector is price discovery. If there are only a few people buying and selling a given company’s stock, it can be very difficult to determine what the right price is. Whatever haggling takes place between the buyers and sellers may reflect the bargaining power of either side or random conditions of the negotiations rather than the actual value of the equity. Larger, impersonal markets are supposed to overcome this problem by spreading trades over multiple locations, involving diverse buyers and sellers. Sometimes the buyer may be desperate, and sometimes the seller might be. In the aggregate, this “noise” should cancel out as a clear price signal emerges.
As Gillian Tett demonstrates in her book, Fools Gold, the inventors of credit default swaps hoped that their derivative could achieve in debt markets what stock exchanges were (theoretically) peforming in equity markets. The ultimate goal was to set exact and stable prices on a wide array of financial risks. The financial engineers saw this as a great triumph of human ingenuity, a technology of risk commodification that would vastly expand societal capabilities to plan and invest. In the giddy days of the real estate bubble, investors who bought both a CDO and a credit default swap may have felt like Midas, guaranteed gains no matter how the future turned out.
As we now know, the price discovery function failed miserably. Complexity, malfeasance, and sometimes outright fraud made a mockery of the finely engineered financial future promised by quants. Instead, the crash generated enormous volatility, with individuals radically uncertain about the value of homes and retirement portfolios.
23. Id. at 64.
24. Gillian Tett, Fool’s Gold (2010).
There is little chance of democratic demands for wholesale reform of finance. The sector’s details are dull, but its culture and promises are glamorous. Sadly, many earnest investors mistake the glitter of venture capital for the unglamorous realities of fixed income arbitrage, algorithmic trading, and mind-numbing derivative contracts. Investors think of their dollars going to innovators and entrepreneurs. But, as Doug Henwood has shown, nearly all of the activity in the current stock market is transfers of existing shares. The money is not going directly to new products or business plans, but is simply part of a massive process of allocating and reallocating claims to the future productivity of existing firms. In the debt markets, the financial needs of the bond investors may be distorting the types of projects that can be completed. Short time horizons and pressures to maximize and guarantee yield steer money to “guaranteed” income from tenants, mortgagors, and prisoners, and away from riskier (but potentially far more productive) projects like green energy.
Self-dealing is rampant in finance. But the sector need not be perfect in order to continue to attract massive amounts of capital; it need only surpass alternatives. In the public mind, it is beginning to do that with respect the government. Individualized, privatized, financialized dreams are bouncing back, even after the crisis. Government debts are public, and campaigns from financiers cast aspersions on them and warn of impending collapse. Meanwhile, financial firms can hide their own debts, vulnerabilities, and risky bets. They can continually malign the government's fiscal foundations, all the while depending on the Fed to back them in case their own gambles fail.
In Shiller’s worldview, the cooperation of big bank and big government leaders is supposed to reassure us, as technocrats work together to optimize economic outcomes. Experts at the commanding heights of business and government are in harmony,
25. James Kwak and Simon Johnson, Thirteen Bankers 15 (2010) (explaining how films like Wall Street made finance glamorous).
26. Doug Henwood, Wall Street (1998). Henwood’s insights here were recently reaffirmed by the editor of the Harvard Business Review. Justin Fox, The Wall Street Book Everyone Should Read, HARV. BUS. REV. BLOGS, Aug. 3, 2012, at http://blogs.hbr.org/fox/2012/08/the-wall-street-book-everyone.html (“shareholders, on aggregate, take much more money out of U.S. corporations (in dividends and buybacks) than they put in, a point Lorsch and I make in the article using recent statistics from the Federal Reserve”).
sharing a common vision. But, as Peter Boone & Simon Johnson have shown, the interconnections between the two can also erode confidence. Boone & Johnson foresee a “doom loop:” as financial institutions are increasingly treated as too big to fail, they are empowered to take greater and greater risks, which will inevitably lead to greater stresses on the governments that effectively sponsor them. These obligations foment worries about governments’ ability to support both TBTF banks and the tens of millions who depend on health and welfare benefits. Meanwhile, as interest rates on sovereign debt are suppressed to spark a recovery, investors feel compelled to flee to the finance sector to gain more than nominal returns. Finance’s black box is all the more appealing as ten-year Treasury bills flirt with their lowest yield ever (in the 130 years or so they have been issued).
The end result is a crippled state promising to succor a reckless finance sector prone to “martingale” strategies—the gambling term for a bettor who doubles down after each loss. As Financial Times columnist John Kay observes, if you are infinitely rich at the start, the martingale strategy is a sure winner, as long as each bet’s chance of winning is greater than zero. But infinite riches are a thing of fantasy, even in an era when the Federal Reserve can create billions of dollars digitally in a matter of hours.
Money is a claim on future production, not a good in itself. The towering digital edifices of credit erected by advanced finance are increasingly disconnected from actual productivity. Rather, they create illusions of prosperity. Behind all the reticulated swaps of risk and reward, the crash of 2008 boils down to a familiar story: risk and leverage hidden in order to promote ever more fee-generating deals. To this day, the tax and accounting manipulations used to demonstrate that various institutions have or have not paid back government bailouts are confounding.
27. Peter Boone and Simon Johnson, The Doom Loop, FUTURE OF FINANCE REPORT (LSE, 2011) (describing how a “doomsday cycle” of privatized gains and socialized losses continues to this day, as “banks and nonbank financial institutions).
28. John Kay, A Martingale Strategy, FIN. TIMES, Nov. 23, 2011, available at http://www.johnkay.com/2011/11/23/it%E2%80%99s-madness-to-follow-a-martingale-betting-strategy-in-europe.
From the tech and telecom craze of the late 1990s to house price escalation from 2002 to 2006, asset bubbles are a predictable consequence of black box finance. Insiders who understand their true dynamics can sell at the top, reaping enormous gains. However rich they become, wealth they draw on is ultimately fictitious: it represents “a claim on future wealth that neither had been nor was to be produced.” By creating the illusion of enormous value in securities like CDOs and CDSs, black box financiers make their own fees (ranging from a fraction of a percent to over 30% in the case of some hedge funds) seem trivial in comparison. When the mirage dissipates, the desert of zero productive gains becomes clear. But in this harsh new economic reality, the fees “earned” by the financiers have all the more purchasing power, arrayed against the smaller incomes of those who did not take advantage of the bubble.
Thus the great paradox of contemporary finance: its premier practitioners are far better at creating need and demand for their “product” (price discovery) than they are at providing it. Theoretical justifications for finance’s power focus on “free markets” generating fundamental knowledge about the economy. Without the great brokerages, and “bank holding companies,” how would we price debt, equity, or the more exotic risks assimilated into derivatives? Yet the rise of financialization has created enormous uncertainty about the value of companies, homes, and even (thanks to the pressing need for bailouts) the once rock-solid promises of governments themselves. Finance thrives in such an environment of radical uncertainty, taking commissions in cash as investors race to speculate on or hedge against an ever less knowable future. This is less a contribution to a “good society” than a condition that makes it impossible to build.
In a recent interview, Daron Acemoglu cast doubt on the growing trend toward empirical studies in development economics. Leaders already know the difference between good and bad policies, Acemoglu says. Nations fail to grow and equitably
29.Benjamin Kunkel, Forgive us Our Debts, LONDON REVIEW OF BOOKS, available at http://www.lrb.co.uk/v34/n09/benjamin-kunkel/forgive-us-our-debts.
30.ALAN MORRISON, INVESTMENT BANKING (Oxford Univ. Press, 2009).
31.Acemoglu on Why Nations Fail, ECONTALK (Mar. 19, 2012) available at http://www.econtalk.org/archives/2012/03/acemoglu_on_why.html.
distribute resources by design, not by mistake. Extractive institutions, like corrupt oil companies or mercenary banks, continually stifle growth. But a research-industrial complex continues searching for the “right policy,” when the real task is to diminish the power of those who sap resources and make economic exchange a rigged game.
It’s hard not to think of Shiller’s work in this light. He thinks of the banking system’s innovations as a cornucopian source of security and wealth, if only we could discover how to “democratize finance.” One can imagine a decade of Shillerite graduate students studying whether 25, 30, or 50-year mortgages are best for homeowners, or how to market options to renters. Meanwhile, median wages and wealth decline, and more of the economy shifts into paper-pushing and skimming off cash flows rather than producing actual goods and services. Highly financialized economies like the U.S. and U.K. stagnate, while the Chinese and German emphasis on manufacturing and research is paying rich dividends.
Had Shiller taken finance’s critics seriously, he could have restored some faith in the research program he spearheads. Instead, the book comes off as a long-winded paean to financiers leavened by occasional pleas that they behave slightly better. Perhaps the work will help revive the confidence deemed so vital to prosperity in Shiller’s co-authored Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. More likely, it will be remembered as an accessible introduction to modern financial institutions, and a ham-handed effort to justify them.
In January, 2012, the Economist published a cover titled “Save the City,” portraying heroic bankers in London as latter-day Churchills fending off a blitzkrieg of misguided critics. Its writers praised financiers for performing vital roles in society. One
32. Id. at 2, 42-43.
33. Stephen S. Cohen & J. Bradford DeLong, The End of Influence: What Happens When Other Countries Have Money (2010).
34. George A. Akerlof & Robert J. Shiller, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (2009).
columnist sternly warned against “demonizing bankers,” lest they decamp to Dubai or Singapore.
What a difference six months makes. In July of the same year, the magazine featured the stark cover title “Banksters,” and ran an editorial on “The Rotten Heart of Finance.” Scandals had proliferated in 2012, ranging from tax avoidance to money laundering for terrorist organizations and drug dealers. But what finally pushed the editors over the edge was the manipulation of the London Interbank Offered Rate, or Libor. Authorities in the UK and US released a trove of emails revealing lies and self-dealing. “This is the banking industry's tobacco moment,” said one CEO.
Shiller seems impervious to such news, and to the settlements relating to racial discrimination, illegal foreclosures on soldiers, tax evasion schemes, reckless risk-taking, money-laundering, and bond bid-rigging in the finance sector he is at such pains to praise. “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 Walt 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.”
Shiller might have better consulted the poet Lawrence Joseph, who has addressed the spread of “technocapital” in poems spanning recent decades. In a work recently published in the London Review of Books, Joseph asks:
Narco-capital techno-compressed
35. The Dangers of Demonology, THE ECONOMIST (Jan. 7, 2012) available at http://www.economist.com/node/21542389.
36. The Rotten Heart of Finance, THE ECONOMIST (Jul. 7, 2012) available at http://www.economist.com/node/21558281.
37. Id.
38. Id. at 138.
39. Id. at 133.
40. Id. at 133-134.
abstractions—anthropomorphically scaled down by the ferocity of its own
obsolescence. Which of an infinity of reasons explain it?
Which of an infinity of conflagrations implode its destruction?
Shiller is at heart a believer in finance, unable to analyze it objectively. His clerical attitude won’t even allow questions like Joseph’s to be asked. But they persist, haunting every village and city devastated by currency instability, ill-considered mergers and acquisitions, slow strangulation of wages by shareholders, or sudden booms and busts. Shiller’s apologetics amount to little more than a theology of finance as it wishes to see itself. We will need to look to other authors for a fair exposition of finance’s nature and effects.
41.Joseph, Here in a State of Tectonic Tension, London Review of Books, Nov. 22, 2012.
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FRANK PASQUALE is a Professor in Law at the University of Maryland Carrey School of Law. He may be reached at fpasquale@law.umaryland.edu.
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