1、Fundamental Long-Term Risks And the New Financial Order,Prof. Robert J. Shiller Yale University,Financial Modernization,Fundamental role of financial institutions Manage risks Maintain incentives Effective financial institutions are found in all successful economies Institutions must continually be

2、adapted to take account of changing nature of risks, new technology,Chinas Spectacular Modernization Since 1990,Established stock market Issued shares to public Established futures markets Created Insurance industry Personal credit/Mortgage,Speculation,Human impulse towards gambling, must be directe

3、d towards constructive ends Capitalism is a set of rules that redirects the human gambling urge in constructive directions Capitalism is vulnerable to market-generated instabilities,Chinas Uncertainties,Will the spectacular economic growth continue? As low wage advantage gradually disappears, will b

4、e harder to sustain growth Possible disruptions of smooth-functioning economic system can slow growth. Growth of 3% a year vs. 9% a year: means China overall catches up to advanced countries in 90 years instead of 30 years,Economic Inequality,Economic incentives must allow for some chance of success

5、and of failure Some inequality is necessary Worldwide trend towards greater inequality is seen in China as well Chinas Gini coefficient has risen from 0.33 in 1980 to 0.46 in 2000, not just due to farmers incomes,Important Reasons for Growing Chinese Inequality,Transition to market economy in China

6、is not making everyone successful at once New information technology appears to tend to concentrate wealth (in China and elsewhere) Assembly line workers Translators Chess players,Winner-Take-All Effect of Information Technology,Information technology allows search to find the best product, and repl

7、ication of the best product Phonographs and singers Television and actors and athletes Rapid acceleration of information technology may create the same effect in many more occupations,Norbert Wiener on Computers, 1948,Computers replace fundamental human abilities Computer may be “more dangerous than

8、 the atom bomb” in that it can destroy jobs and lives,Prominent Financial Issues under Discussion in China,Valuation of the yuan Nonperforming loans Capital controls A second board market,Other Ideas for Financial Innovation,Many changes should be coming in world financial markets that China should

9、adopt too China is an innovator in choosing its own path, could set the path for other countries My books: Macro Markets, Oxford University Press, 1993, in Chinese 2001, and The New Financial Order: Risk in the Twentieth Century, Princeton University Press 2003 and Chinese Peoples University Press w

10、ith Liang Jing Publishing Studios, 2004,Ideas for China,An effective progressive tax and wage subsidy system that addresses inequality Inequality insurance Electronic money replaces cash New units of measurement: indexed units of account A universal social security system that addresses income and h

11、ealth problems,Ideas for China Continued,Intergenerational risk sharing Macro securities: China sells shares in its GDP to foreigners Livelihood insurance: encourage entrepreneurship on individual basis Home equity insurance: manage risks to home values,A More Effectively Progressive Income Tax Syst

12、em and Earned Income Tax Credit,Higher taxation of successful people used to subsidize less successful Subsidy of less successful is made in terms of a wage subsidy (EITC) to maintain incentives,Inequality Insurance,Tax rates could be indexed to a measure of inequality in such a way that inequality

13、is prevented from worsening Can legislate a tax system that prevents further worsening Implement a plan for such a tax system that will alleviate income inequality in the future even if the system cannot be implemented for some time.,Move towards Electronic Money,Cash transactions are hard to tax Th

14、oroughgoing use of electronic money in China would make an effective income tax and wage subsidy system feasible In US, cash transactions are confined to small items, newspapers, candy bars Electronic payment systems already here in China: need to expand them,Indexed Money,Once we have a system of e

15、lectronic money, the money can be indexed Inflation-indexed debt allows savers to lock in their future returns Inflation-indexed life annuities allow people to guarantee their retirement Indexation can be helped by creating new units of measurement: the Unidad de Fomento (UF) of Chile,Social Securit

16、y System:Old Age Insurance,Social Security is in ferment around the world today because of declining birth rate In coming decades, will be large number of elderly relative to working people in China, as in many other countries,Intergenerational Risk Sharing,In many countries, old-aged pension benefi

17、ts are indexed to inflation But that eliminates risk to the elderly, concentrates risk on working adults and children Social security system must be established on a sound theoretical framework based on theory of intergenerational risk sharing,China Should Sell Shares in its GDP to Foreigners,Chines

18、e uncertainty is borne by Chinese alone today Believers in the Chinese economy abound, all over the world China needs to use these believers as investors to manage its risks China needs to diversify its portfolio somewhat, and a deal can be struck to do that,Loans with GDP Warrants,GDP warrants grew

19、 out of oil price warrants issued as part of Brady-Bond refinancing for Mexico, Venezuela, and Nigeria Bulgaria issues warrants on GDP as part of Brady-Bond refinancing, 1994. Bulgarian warrants, inseparable from discount bonds, have not created salient price discovery for claims on Bulgarian GDP,Ec

20、onomic Derivatives MarketGoldman Sachs-Deutsche Bank,First Auction, October 2002, Nonfarm payroll Auctions in ISM Index, IFO Index planned Parimutuel Digital Call Auction (PDCA) Longitude, Inc., New York,Macro Markets,US patent #5,987,435 with Allan Weiss (Case Shiller Weiss, Inc.) would to create s

21、ecurities based on income aggregates or real estate prices: “macro securities” Allan Weiss, Sam Masucci and I have founded Macro Securities Research (1999) and Macro Financial LLC (2004) to promote macro securities Working with American Stock Exchange, completed legal work, one specialist firm has c

22、ommitted to make a market,Macro Securities,Macro securities issued and redeemed by exchange only in pairs, one long and one short. Each member of pair has a cash account made proportional to some economic index (such as GDP) by reallocating across accounts Each Macro pays dividends equal to interest

23、 on their cash account (NAV). Price of Macro should in equilibrium reflect market valuation of claim on cash flow,Declaration of Nuevo LenAdvocates GDP-Indexed Debt,Summit of Americas, Monterrey Mexico, January 2004 Signed by 34 Western Hemisphere heads of state Tying debt of countries to countries

24、GDPs helps insulate their economies from macroeconomic fluctuations Subject of GDP-Linked Debt will be on agenda of international conferences,Livelihood Insurance,Replaces life insurance in dealing with largest risks Long-term policies based on occupational indexes Repeated measures occupational indexes: Robert Shiller and Ryan Schneider Rev. Incom