The New Financial Order
Summary
Shiller proposes that finance should be redirected from speculation on securities to insurance against the large risks that actually determine people's lives. His starting point is that individuals face enormous uninsured exposure to their own career prospects, to the value of their home, and to the fortunes of their country and their occupation, while financial markets concentrate on comparatively small risks.
He sets out six proposals. Livelihood insurance would pay out if the income of an occupation declined over decades. Home equity insurance would protect a household against a fall in local house prices. Macro markets would allow trading in claims on national gross domestic product, letting countries and individuals diversify country risk. Income-linked loans would adjust repayment to the borrower's earnings. Inequality insurance would index the tax system to distributional outcomes rather than to fixed brackets. Intergenerational social security would share risk across cohorts explicitly. He also argues for improved economic units of account and for indexed accounting.
The supporting material combines a survey of risk-management theory, the history of insurance and social insurance, and Shiller's own work on real estate index construction, which later produced the Case-Shiller indices and traded contracts on them.
Most of the proposals have not been adopted. The book itself acknowledges the obstacles, including moral hazard, adverse selection, the difficulty of constructing trustworthy indices and the political economy of long-horizon contracts. Income-share agreements have appeared in education finance with mixed results, and gross domestic product-linked sovereign bonds exist but trade thinly. Read it as a research agenda rather than as a description of anything that exists.
Key takeaways 7
- The largest risks households face, meaning career income and home value, are almost entirely uninsured.
- Financial innovation should be judged by whether it spreads real risks, not by whether it creates trading volume.
- Livelihood insurance against long-run declines in an occupation's income is technically constructible using index data.
- Home equity insurance requires a reliable local price index, which is why index construction is the binding constraint.
- Markets in claims on national output would let small countries diversify risks they currently bear alone.
- Loans indexed to borrower income shift risk to lenders who are better placed to diversify it.
- Social insurance systems should be indexed to measured outcomes rather than written as fixed nominal promises.
Who should read it
Founders and investors in insurance and fintech who want a serious catalogue of risk-transfer products that do not yet exist and why they do not.
About Robert J. Shiller
Sterling Professor of Economics Emeritus, Yale University; co-creator of the Case-Shiller home price indices; Nobel laureate in economics 2013
Excess-volatility work and Irrational Exuberance are the primary sources for the empirical case that asset prices move far more than fundamentals justify.
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