Don’t Demonize Finance After Crisis, Says Shiller

Finance is necessary for economic growth

Expanding access to finance can lead to better management of risks, goals

Finance can be a force for good and good works require finance

In an interview with IMF Survey online, to coincide with the publication of Finance and the Good Society, the Yale economist describes how finance, through inventions like insurance, mortgages, and pensions has historically benefited society.

He suggests that “finance is a powerful tool we can use for the public good.”

IMF Survey online: Many blame the financial sector for precipitating the current economic crisis, so why do you want to extend access to finance?

Shiller: I think people think of finance in the wrong terms. They see it as making money or getting rich. When you think about finance, you should think about financing activities.

For example, if you want a hospital in your community, you have to finance it. If you want better schools or you want a college, you have to finance them. If you want to support a church, build a mosque or anything else—this all needs financing. Anything that we have as a big purpose involves us in finance.

To me, what we have to do is democratize finance. We have to expand it so that it manages the risks and goals of everyone. The world is getting much wealthier, in the main. Economic growth, especially in the emerging countries, is wonderful and it is because of financial modernization.

IMF Survey online: Your book touches upon this widespread belief that those in finance are only out to make money for themselves. So is that really the case?

Shiller: The public loves to criticize people in finance. When movies are made about financiers, they are always represented as evil. I think it is just part of our culture. It is because they make so much money. We do not feel very sympathetic to them.

I think our moral commitments took some beating in the boom that preceded the recent recession. For example, financiers were issuing mortgages, for example, to homeowners that really cannot afford them. They were not telling the truth about the fact that home prices could fall and result in your financial ruin.

And [these moral failings] tends to happen when people think everyone else is doing it, so I have to do it, too.

And now we are in a period—after the crisis—of retrenchment, and we are wondering if this was moral. However, I think it will self-correct.

IMF Survey online: What lessons did we learn from the crisis? How do...