Global Strategy - blog

The presentation was given by Prof. Robert Shiller the other day. Chaired by the director of the LSE, Howard Davies, this very topical and interesting public lecture may have practical consequences as well.

Amusingly, Shiller began his speech by showing a disclaimer written by his lawyers, for the obvious reasons. Yale professors of economics seem to be carefully listened to. His main argument was that the cause of all this economic turmoil is psychological contagion and groupthink. He illuminated this point by telling a story from his own life: when things were going ‘well' in the governing bodies, people in charge were reluctant to hear the bad news or direct criticisms, especially directed at managing risk. Even more, he mentioned that many of those who were unable to see what was coming are now trying to fix it.

Elaborating some deficiencies in econometrics, particularly in terms of using and trusting data, he furthered his point that social epidemics having these kinds of consequences are such that the current system is unable to identify and take care of. He had, however, some concrete suggestions to improve it.

Shiller sees the management of real estate risks being the first that needs repair. First, a new information infrastructure should be created, where the real estate brokers or lenders are not the main sources of information for the buyers. Furthermore, he suggests that general, independent financial advisory should become subsidised in a way or another. This would effectively protect the sometimes uneducated buyers from the agency problems of the sellers.

This kind of general advisory would be paid by the buyer with an hourly rate, and would thus provide at least less biased information. The customer in this situation would not be the bank paying commission, but the individual interested in financial advice. It could be also fairly simple, such as: "It is unwise to buy the house, you cannot afford it."

By the way, Shiller told an interesting anecdote. John Moody himself, the founder of Moody's Corporation, did not accept any payment from the target companies of his analyses. That practice does not exist anymore.

Podcast of the event is available here.