Schiller: “The Financial Fire Next Time”

There’s a good post by Robert Schiller on ProjectSyndicate on the failure, since the financial crisis, to evolve markets to prevent another crisis. Schiller, who is a long-time advocate of expanding creative risk management options in areas such as income protection and housing, (a position I wholeheartedly support) is critical of regulators’ inability to develop some of the new thinking that has emerged since the crisis.


Speaking to Andrew Caplin of NYU, for example, Schiller notes:

At the session, I asked Caplin about his effort, starting with his co-authored 1997 book Housing Partnerships, which proposed allowing homebuyers to buy only a fraction of a house, thereby reducing their risk exposure without putting taxpayers at risk. If implemented, his innovative idea would reduce homeowners’ leverage. But, while it was a highly leveraged mortgage market that fueled the financial crisis 11 years later, the idea, he said, has not made headway anywhere in the world.

Why not, I asked? Why can’t creative people with their lawyers simply create such partnerships for themselves? The answer, he replied, is complicated; but, at least in the US, one serious problem looms large: the US Internal Revenue Service’s refusal to issue an advance ruling on how such risk-managing arrangements would be taxed. Given the resulting uncertainty, no one is in a mood to be creative.

Schiller is absolutely correct that more could be done to develop new and improved micro-economic risk management solutions. Both his critique and call to action are on the spot.

Read more at–shiller-asks-why-innovative-ideas-to-prevent-another-financial-crisis-have-gained-no-political-or-media-traction#OMqJ27sgEbQWKQdT.99

Carlos Alvarenga

Founder and CEO at KatalystNet and Adjunct Professor in the Logistics, Business and Public Policy Department at the University of Maryland’s Robert E. Smith School of Business.

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