The New Financial Order: Risk in the 21st Century

The New Financial Order: Risk in the 21st Century

The New Financial Order: Risk in the 21st Century

The New Financial Order: Risk in the 21st Century

Synopsis

In his best-sellingIrrational Exuberance, Robert Shiller cautioned that society's obsession with the stock market was fueling the volatility that has since made a roller coaster of the financial system. Less noted was Shiller's admonition that our infatuation with the stock market distracts us from more durable economic prospects. These lie in the hidden potential of real assets, such as income from our livelihoods and homes. But these "ordinary riches," so fundamental to our well-being, are increasingly exposed to the pervasive risks of a rapidly changing global economy. This compelling and important new book presents a fresh vision for hedging risk and securing our economic future. 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.

Excerpt

Economic gains achieved through technological progress do not themselves guarantee that more people will lead good lives. Just as enormous economic insecurity and income inequality pervade the world today, worsening conditions can develop even as technological advances mark greater levels of economic achievement. But new risk management ideas can enable us to manage a vast array of risks—those present and future, near and far—and to limit the downside effects of capitalism’s “creative destruction.” Application of these ideas will not only help reduce downside risks, but it will also permit more positive risktaking behavior, thereby engendering a more varied and ultimately more inspiring world.

The New Financial Order proposes a radically new risk management infrastructure to help secure the wealth of nations: to preserve the billions of minor—and not so minor—economic gains that sustain people around the world. Most of these gains seldom make the news or even evoke much public discussion, but they can enrich hard-won economic security and without them any semblance of progress is lost. By radically changing our basic institutions and approach to management of all these risks both large and small we can do far more to improve our lives and our society than through piecemeal tinkering.

Just as modern systems of insurance protect people against catastrophic risks in their lives, this new infrastructure would utilize financial inventions that protect people against systemic risks: from job loss because of changing technologies to threats to home and community because of changing economic conditions.

If successfully implemented, this newly proposed financial infrastructure would enable people to pursue their dreams with greater confidence than they can under existing modes of risk management. Without such a means to greater security, it will be difficult for young people, whose ideas and skills represent the raw materials for a growthoriented information society, to take the risks necessary to convert their intellectual energies into useful goods and services for society.

Historically, economic thinkers have been limited by the state of relevant risk management principles of their day. Recent advances in finan-

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