Shiller: Democratize Wall Street, for Social Good

Robert Shiller is bullish on Wall Street:

Democratize Wall Street, for Social Good, byRobert Shiller, Commentary, NY Times: Many finance students and members of the Occupy Wall Street movement have a great deal in common: a deep interest in democratizing Wall Street.

At Yale, where I have been teaching for 25 years, I’ve been hearing a great deal lately from my students about financial innovations linked to social media. One such innovation, called crowdfunding, is embedded in the jobs bill signed into law by President Obama... The idea involves Web sites that help many investors contribute small amounts of capital to projects that they read about online, and that might otherwise be starved for money. ... There may well be disappointments at first, but the concept can be tinkered with, like other democratizing financial innovations that have eventually delivered much good to society. ...

Financial innovation, of course, takes unanticipated forms, but wherever it turns next, we can expect some breathtaking transformations during the careers of today’s students. And despite the damage to its reputation from the subprime mortgage crisis and its aftermath, financial innovation could help solve many vexing problems...

Contrary to popular opinion these days, the history of finance marks ... “ever-widening circles of activity” with products ranging from venture capital to home mortgages to various forms of insurance, savings and pensions. The faults in institutions that contributed to the recent financial crisis can be corrected... The challenge ahead — both for my students bound for the world of finance and for those who would occupy it — is to truly democratize Wall Street.

This financial innovation stuff is apparently pretty magical. It can "help reduce social inequality ..., deal with the problem of rigid entitlements ..., make our responses to catastrophes more intelligent, ... channel our gambling impulses into something more constructive, ... better direct creative energies," and "focus specifically on problems specific to the very poor." And to top it off, "It can make speculative bubbles less of a problem, and help make prices in financial markets better reflect fundamental information."

Is there anything that financial innovation can't do to make the world a better place?

More seriously, sure, financial innovation has had its successes, but some of it just redistributes income -- in both intentional and unintentional ways -- without much to show in terms of efficiency, and there have been catastrophic breakdowns as well with costs that spread far and wide. No news there given what we've just been through. So I suppose I'm not so positive about Wall Street -- too many China shops are still under repair from the last time bullish financial  innovation got loose -- and would prefer to see more emphasis on how to keep the system stable in the future.