The Shiller Hedge

One of the reasons economists can be really annoying is that they always hedge. Or rather the more ethical, sober, and diligent ones do. This is, I think, because they have no strong theoretical footing. There is too little definitive in economics. Most of it is couched in excessive caveats. And even then it rarely says much that matches what we observe happening. Instead of saying “if this … then that”, most economics says “if this, if this, if this, if this … and if this … then maybe that, but only if this as well”. Worse, most of those caveats are other-wordly. Thus making the entire enterprise surreal.

But enough of that.

The result is that when a clever fellow like Shiller opines on something potentially incendiary or provocative, he feels obliged to be ultra-careful. Almost to the point of being noncommittal. The theoretical ground work being sufficiently unreal and riven through with unreal assumptions that any statement based upon it is necessarily equally riven through with doubt.

So when Shiller launches a shot at the financial industry it comes across as a nuanced and very balanced argument. Certainly restrained and well considered. And thus not much of a shot at all. You could be forgiven for not realizing that Shiller is lambasting finance and all who sail in it. In fact you could be forgiven for thinking he thinks finance is jolly good, in an economics kind of way.

If you look at banking and finance as an allocative device whose social function is to direct funds to the best projects available at any given moment you wouldn’t be far wrong. So you could then go on and try to measure how well its done. That’s very difficult because there’s a mess of other stuff that could get in the way of good allocation, but over time that stuff ought to be overcome.

So the question is: has our unregulated banking and finance system done a good job? Is our available pot of funding well allocated?

No. No it’s not.

This is, I think, part of Shiller’s message. The financial system has become something that makes money, not through good allocation but by through trading for its own sake. It diverts funds from the real economy – building factories, or financing new businesses for instance – and channels those funds into rent seeking activities.

Rent seeking being an activity that has no purpose other than to create a profit. No value is added to the economy at all, but the banks make a profit anyway.

And since rent seeking is easier than asset allocation – which is risky and requires tenacity and skill – it attracts hordes of clever folk who see an easy route to riches. They thus don’t go off into the economy and do socially useful things that end up creating jobs and wages for others, they sit at trading desks and gamble in order to earn fat bonuses. Or they run funds that buy companies and then fire the employees in order to recoup their investment and earn a profit.

What Shiller is trying to say is that deregulation was a total bust; that finance absorbs way too much talent; that the economy is thus messed up; and that we ought to be doing something about this.

Fortunately I am unencumbered by Shiller’s professional need for restraint. I see no need to hedge.

So I can say it: our banking system is screwed up and bankers are still ripping us off. Which is awful considering what the industry did to us a few short years ago.

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