What now?

Alex Nabaum

Alex Nabaum

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Democratize finance
Robert J. Shiller


The current proposals for a fiscal stimulus, particularly along the lines of infrastructure improvements, the various bailouts, and tax cuts for the middle class, are all fine and necessary short-run fixes. But this is the most ominous economic situation we've been in since the Great Depression, and I'm worried that we may be in for a profound drop in confidence that we'll have trouble getting out of. We may need an even greater stimulus package, and for the long run, we need something more.

We're in the middle of a crisis for capitalism. People feel that our capitalist institutions have failed, and yet our recent prosperity has been brought about by these capitalist institutions. To provide the inspiration required to lift us out of this potential depression, President Obama must work to make these businesses better for all of us.

I'd suggest that we need most of all to democratize finance. All segments of society, not just the wealthy, should have the benefit of sound financial principles.

One way to do this is to improve the financial advice that people get by establishing a Financial Products Safety Commission. The new president also needs to work toward improving our retail financial products, mortgages in particular. The mortgage institutions aren't working correctly if we have a huge rash of foreclosures. It's time for government intervention to create a new kind of mortgage contract that protects homeowners.

We also need to expand our risk markets -- but make them less of a house of cards, which is today's situation: if one institution fails, many others go down with it. If, for example, we could create markets for real estate risk that are really liquid and that show expected prices for real estate out, say, five to ten years, this would direct the economy and be a fundamental improvement over the current situation.

But the biggest problem facing the country today is not the subprime crisis and the resulting economic fallout. Rather, it's the growing inequality between rich and poor. That's not the way I want this country to go, and I think most of us don't as well.

So I'd suggest that President Obama, who, after all, received an electoral mandate to reduce inequality, create a tax system indexed to inequality. The indexation scheme would automatically kick in if inequality gets worse. You wouldn't necessarily be making the rich poorer, but you would be offsetting any increases, freezing the inequality at today's level, and not letting the gap grow.


Robert J. Shiller is the Arthur M. Okun Professor of Economics and a cofounder of MacroMarkets. His most recent book is The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It.

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