Shiller front

Broad Advocacy for Massive Risk Sharing
To ensure that risk sharing proceeds on a truly massive scale, public ad-
vocacy will be needed. Society cannot just create exchanges to trade
new risks and hope that people start trading. There has to be a human
force behind the actual use of new risk management instruments. The
benefits of such risk sharing are not so obvious to most people. Opin-
ion leaders will have to take steps to make these ideas compelling.
Advocacy of risk management devices has always been difficult. This
advocacy has to begin to substantial degree at an abstract level, like the
advocacy for consumer product safety. Unsafe products, like cars that
do not adequately protect passengers in accidents, often cannot be
identified except by statistics of accident records, and so the risks are
not really directly visible to the public. Even people who suffer exces-
sively after accidents will usually not know that the product was really
at fault, without the statistical evidence. Moreover, after the safety
problem is corrected, one will generally not meet people who are
thankful to know that they were spared serious injury because of the
correction of the safety problem. The same is true with major eco-
nomic risk management devices. People do not generally perceive risk
management problems that might be solved through risk sharing. Af-
ter the risk problem is corrected through financial innovation, years
later, the financial arrangements will be so commonplace that most
people will take for granted the innovation that helps them.
A major role of advocacy must fall on our governmental leaders.
They can enunciate a new vision for a society spared from the random
shocks that attend economic change. Their vision can lead to public
support for the kind of information infrastructure essential to such
change. History shows that much of financial innovation, even that
which appears in the private sector, occurred only after some govern-
ment initiative to improve financial markets.
Advocacy should come also from leaders from outside the govern-
ment. Business leaders have their role to play. Those who are in the
business of financial risk management should see democratizing finance
as a major goal for them, a way for them to use their particular skills to
benefit all of human society as well as to broaden their customer base.
International economic development organizations, such as the World
Bank, the International Monetary Fund, the World Trade Organiza-
tion, and the United Nations Conference on Trade and Development,
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are particularly well suited to advocate major risk-managing arrange-
ments because they deal with many countries and are familiar with their
various economic weaknesses. These organizations are in an excellent
position to encourage direct international risk-sharing agreements as
well as national risk management securities issuance and investment.
Labor unions should have an important leadership role in democra-
tizing finance. Sponsoring new risk management policies and procedures
could be a life saver for their members, protecting them against a harsh
outcome in the event of great income inequality, protecting them per-
haps far better than any ongoing collective bargaining alone ever could.
Unions are in a particularly good position to understand the risk man-
agement needs of their members, needs that are connected to their oc-
cupational niche and their personal circumstances. These unions could
help design occupational insurance for their members and select labor
income indexes that are particularly relevant to them. They could advo-
cate home equity insurance policies for their members, with attention to
special needs of members—attention, for instance, to the risk that a plant
closing in an isolated community could harm the home values there.
They could advocate pension plans that invest in macro securities that
serve to offset risks to occupational income fluctuations. They could also
provide information about the specific needs of their members.
Professional organizations—of doctors, lawyers, accountants, and
the like—could arrange for similar risk management devices for their
members. Their advocacy might take the form of recommending spe-
cific forms of risk management contracts, arranging for the creation of
proper income indexes for settlement of contracts, and sponsoring
livelihood insurance, macro securities, and other devices specifically de-
signed for their members.
Charitable and benevolent and religious organizations, which are
often the only advocates of the least advantaged elements of our soci-
ety, could also play a fundamental role. Their support of risk manage-
ment institutions would be a major source of stability besides the sup-
port afforded by the government. Some of their traditional causes
have a risk management element to them, and their making this ele-
ment more explicit and allying with others’ risk management efforts
can be of great help.
An extensive program of advocacy for fundamental risk management
by all these parties may ultimately overcome the resistance to change in
our institutions and lead to a safer economic environment for everyone.
making the ideas work
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New Units of Measurement
and Electronic Money
THE FAILURE OF MONEY to serve as a stable and sensible unit
of measurement for financial transactions has caused innumerable fi-
nancial dislocations. The dislocations caused by inflation or deflation
are so well known that the public in virtually every country of the world
has become fixated on the uncertainties of the value of money.
A computer search of English language newspapers in the late twen-
tieth century shows that the word “inflation” was the most commonly
used economic term of all; in fact, newspapers use “inflation” more
than “sex.” All this public attention to inflation is not because of some
inherent fascination with that abstract economic topic. Instead, people
pay attention because, with the value of the currency unit changing in
unpredictable ways, they have become wary of its impact on their lives.
1
One wonders, then, why we do not have units of measurement, for
our financial and other contracts, that remain stable and meaningful
through time. Our scientific units of measurement—liters, meters and
grams—do not change. Why do we not have stable fundamental eco-
nomic units of measurement too? Achieving such stable units of meas-
urement, which may through time begin to replace the unit-of-account
function of money, is the subject of this chapter.
A look at history reveals some extreme examples of the problems
caused by an unstable monetary standard. In 1923, Germany experi-
enced a rise of prices, called the “hyperinflation,” that was so great that
the value of the currency, the mark, fell to a billionth of its value of a few
years earlier. Prices rose so high that the Germany government had to
print one hundred million mark notes to serve as hand-to-hand cur-
rency, and three million mark postage stamps. Today one can buy these
old notes at coin and stamp collectors’ stores, now practically worthless.
The consequences of the enormous German inflation were absurd
redistributions of wealth. Those German citizens who put their life sav-
ings in government bonds before the hyperinflation (bonds whose
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