Financial Markets and Real People

Professor Robert Shiller, the author of Irrational Exuberance has delivered a series of lectures constituting a Yale Economics course online entitled Financial Markets. The last in the series is called Making It Work for Real People: The Democratization
of Finance

. The course is part of Open Yale Courses and distributed through Creative Commons

There are a number of ways to listen to the lecture(s) using Audio
mp3, or on video using medium, low or high bandwidth. Finally, it can read in html.

“What follows is a few paragraphs from that lecture:

It’s not altogether bad because part of the reason inequality is getting worse is that they’re suddenly getting rich people. If everyone’s getting better off, you could say, what’s the problem? In many ways that is the right answer, but I think that we can’t tolerate excessive inequality. The beauty of it is that the very same capitalism that has been generating inequality has solutions for it. Many of our venerable economic institutions that we already have are working against inequality, so I’ll mention just for example life insurance. That helps alleviate inequality by eliminating one important cause of inequality. A lot of poor people, traditionally, are people who’ve lost – families that have lost one of the two parents, either the mother or the father. Of course, that puts the family in stress because they have just lost half of their adults. If you have life insurance, that solves that.”

“Another source of inequality is solved by health insurance. An important cause of inequality is somebody gets sick, so they are unable to earn an income and they end up in disastrous economic situations. Another one is disability insurance. Disability insurance protects you against something like an accident that causes you to become unable to hold a job; that tends to be a lifetime thing. Disability insurance is a lifetime insurance contract; you pay for it while you’re healthy. If you become disabled, you get support for the rest of your life. These are just some examples of how inequality is already being dealt with through risk management institutions and why finance – I always lump insurance in – these are all insurance, but I lump that in with finance as risk management and why they’re so important.”

“We still see inequality getting worse, so I think that is a challenge toward improving risk management institutions. The subprime crisis that we’re in now is really substantially due to failures of our risk management institutions. Notably, we have had a failure to provide institutions to help people to diversify their own household portfolios. So, people who bought a house would have been in a highly leveraged position and vulnerable to risks of changes in home prices and to other risks. We need to go a lot further. Now, part of this theme of democratization of finance is that we have to pay respect to behavioral finance. That’s because people don’t – especially the less educated or less capable people – don’t always make optimal use of financial instruments like, for example, insurance. If people don’t make use of risk management contracts, then we have a problem.”

Read or view the rest of the lecture. The series ends with two lectures by Lawrence Summers, Director of the National Economic Council and Assistant to the President for Economic Policy.
1. Finance and Insurance as Powerful Forces in Our Economy and Society
2. The Universal Principle of Risk Management: Pooling and the Hedging of Risks
3. Technology and Invention in Finance
4. Portfolio Diversification and Supporting Financial Institutions (CAPM Model)
5. Insurance: The Archetypal Risk Management Institution
6. Efficient Markets vs. Excess Volatility
7. Behavioral Finance: The Role of Psychology
8. Human Foibles, Fraud, Manipulation, and Regulation
9. Guest Lecture by David Swensen
10. Debt Markets: Term Structure
Midterm Exam 1
11. Stocks
12. Real Estate Finance and Its Vulnerability to Crisis
13. Banking: Successes and Failures
14. Guest Lecture by Andrew Redleaf
15. Guest Lecture by Carl Icahn
16. The Evolution and Perfection of Monetary Policy
Midterm Exam 2
17. Investment Banking and Secondary Markets
18. Professional Money Managers and Their Influence
19. Brokerage, ECNs, etc.
20. Guest Lecture by Stephen Schwarzman
21. Forwards and Futures
22. Stock Index, Oil and Other Futures Markets
23. Options Markets
24. Making It Work for Real People: The Democratization of Finance
25. Learning from and Responding to Financial Crisis, Part I (Guest Lecture by Lawrence Summers)
26. Learning from and Responding to Financial Crisis, Part II (Guest Lecture by Lawrence Summers)
Final Exam