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The New Financial Order: Risk in the 21st Century
By Robert J. Shiller. 2003. Princeton, NJ: Princeton University Press. Pp. 382. $29.95 cloth.
The heart of The New Financial Order by Robert Shiller, Professor of Economics at Yale University, is a conviction that:
" ...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' ....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" (p. ix).
Professor Shiller picks "six fundamental ideas" that the new financial order will use to "protect people against systemic risks." Three private sector ideas include insurance for livelihoods and home values, "macro" securities and markets to hedge incomes and real estate, and income-linked loans to hedge bankruptcy. Three public sector ideas include income inequality insurance, intergenerational social security, and hedges against unexpected changes in "per capita GDP or its analogues" (p. 177). Overall, the "book presents ideas for a new financial order, a new financial capitalism, and new economic infrastructure, and further describes how such ideas can realistically be developed and implemented" (p. 2).
For example, young people considering careers they really love may think twice if they fear salaries might decline. They could buy livelihood insurance just like life or car insurance that would compensate them if their preferred career income dropped. Expecting, say, a $80,000 salary they would purchase an insurance policy with a floor salary of perhaps $40,000 for a fixed period of time. Insurers would diversify these risks, develop procedures to minimize moral hazard, and hedge downside systematic risk by buying "down" macro securities in livelihood macro markets.
A "down macro security" is one of the pair of securities Shiller proposes that would allow ordinary people to hedge individual risks that include reductions in their incomes or home values, companies to hedge business risks, and governments to hedge macroeconomic risks. Buying "up macro securities" can be an investment in or a hedge against price increases in the same trading units.
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