Yale’s Shiller: Stop Trashing Financial System

Wednesday, 18 Jul 2012 11:35 AM

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Yale economist Robert Shiller has had it with people trashing our financial system.

“It’s fundamental that our society is built around financial institutions,” Shiller told Forbes magazine. “Things that we want to see happen have to be financed. That’s the way it works.”

The financial system allows activities to happen, not just momentarily, but things that will go on for years, he said.

“It allows our purposes to be fulfilled,” he noted. “That doesn’t say that bad things don’t happen in the financial world, but the basic core is an invention of incredible power.

“The crazy things that sometimes happen in financial markets lead some people to doubt the value of the whole concept of the financial sector,” Shiller said. “The financial markets tell you the ugly truth. You see the price movements. Everybody knows what happened and how big it was. And then we learn from this experience.”

Shiller stated that there have been “enormous” returns on stocks, on average, since the stock market was created, noting that “there’s something they’re doing right.”

The idea of financial markets confirms that people are faddish, Shiller stated, and the best way to deal with that is to have free access to markets and to have someone who can freely analyze the prices that are developing and take hedging steps to prevent a disaster.

Regarding the recent financial crisis, Shiller said it was not the result of an inherent flaw in free markets.

“I would say it’s a flaw in the systems that we had in place, and institutions,” he noted. “We’ve, in history, had to reinvent our markets and our financial institutions. It’s not just the government. It’s the private sector and the government that have to change their thinking in response to accidents. This was an accident," he said.

“The fundamental problem isn’t free markets,” Shiller said. “The fundamental problem is the existing institutions and the existing models that people had, that have to be fixed and improve.”

Shiller would like to see something positive done for those who have lost their jobs and are in danger of losing their homes.

“My idea is that we should do something for them, something constructive,” he said. “But let’s make it happen so that the government doesn’t need to get involved the next time.

“We should rethink our mortgage institutions. I’ve argued for preplanned workouts that would be not paid for by the government — that would be priced into the original mortgages so that people don’t have to have this problem again.”

According to the latest report from foreclosure listing firm RealtyTrac Inc., the number of foreclosures in the United States fell 11 percent in the first half of the year as compared with the first half of last year. However, the more than 1 million U.S. properties with foreclosure filings in the first six months of the year was up 2 percent from the previous six months.

“Additional scrutiny on how lenders and servicers process foreclosures, along with aggressive foreclosure prevention efforts by the federal government and several state governments, continue to keep a lid on the foreclosure problem at a national level,” said Brandon Moore, chief executive officer of RealtyTrac.




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