Wednesday, 7 May 2008

A few quick thoughts on The New Financial Order

I won't go into too much detail or I will spend my whole lunch break writing this, and I can't do it any justice unless I write a really long review. But anyhow I've finished the book, and as is probably clear from my various posts as I've reading it I am really impressed. The subtitle is 'Risk in the 21st century' which is what the book is all about really.

Broadly Shiller's argument is for the extension of financial risk management into areas where it currently has no role (he calls this the democratization of finance). He suggests the introduction a range of new policies that are intended to help people share actual or potential risks. These include livelihood (income) insurance, income-linked loans and inequality insurance (really re-framing tax so that inequality does not increase further) plus his previously-developed idea of macro markets.

Some of the ideas are pretty radical. The proposal of income-linked loan is a good example. As it suggests, the amount to be paid back could be reduced if the borrower experienced a drop in salary. Similarly they could take out insurance against this eventuality. Clearly people will immediately think "Moral hazard" but a) I wonder how strong the peverse incentives would actually be and b) they can be mitigated with a bit of thinking. In fact some of these ideas have already been implemented, albeit in a limited way (even income-linked loans).

One challenge for ideas in the book is getting one of the central concepts - global risk information databases (GRIDs) - off the ground. These would be necessary in order for some of the ideas to work, yet you can imagine the reluctance to implement such systems.

As I have posted previously, one of the things I really like about the book is his emphasis on the importance of framing policy in a way that will contribute to its success. As just one example he notes that people do seem to genuinley consider national insurance contributions as contributions - rather than a tax - and as such they are more palatable. This immediately made me think of the argument a few years ago that compulsion to save into a pension would be seen as a tax. In retrospect I think we shouldn't have worried about this argument at all (and we didin't worry about it much) since I think it has even less purchase if your contributions can be seen in your own pension pot.

The final thing I take away from the book is further reinforcement of the idea that financial innovation has the potential to do a lot of good (not a popular message in the current environment I'm sure!). If the Left is going to continue to be relevant it needs to keep up to speed with how the economy is changing and how we might adapt our responses. There are ideas here we can definitely work with if we are prepared to be a bit open-minded.

For loads more info: The New Financial Order

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