Economics

Le Frodi, gli Sciocchi, e i Mercati Finanziari

Sep 17, 2015 Robert J. Shiller

NEW HAVEN – Come è noto Adam Smith scrisse della “mano invisibile”, mediante la quale il perseguimento da parte degli individui del proprio interesse in un libero mercato competitivo fa avanzare l’interesse della società nel suo insieme. E Smith aveva ragione: i mercati liberi hanno generato una prosperità senza precedenti per individui e società. Ma, poiché noi possiamo essere manipolati o ingannati o anche solo passivamente tentati, il libero mercato cerca anche di convincerci a comprare cose che non vanno bene né per noi né per la società.

Questa osservazione rappresenta una precisazione importante nella visione di Smith. Un argomento che George Akerlof ed io analizziamo nel nostro nuovo libro, Phishing for Phools: The Economics of Manipulation and Deception.

La maggior parte di noi ha subito il “phishing”: e-mail e telefonate indesiderate destinate a frodarci. Un “phool” è chiunque non comprenda pienamente la capillarità del phishing. Un phool vede esempi isolati di phishing, ma disconosce il grado di professionalità dedicato ad esso, né quanto profondamente questa professionalità condiziona le vite. Purtroppo, molti di noi sono stati phool – compresi Akerlof ed io, motivo per cui abbiamo scritto questo libro.

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0 Comments on this paragraph, 29 Comments on this article

peter fairley Sep 28, 2015

I like everything by Robert Shiller but disagree a bit with funny mortgages as purely Phishing. Seems more like saying who causes prostitution, the prostitute or the John. Robbing the bank with liar loans and Alt A's were so attractive, organized crime & other crooks were doing it. You got more money, with less risk than a normal bank robbery.
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M A J Jeyaseelan Sep 21, 2015

Reading this article reminds me of the long and endless American debate on gun control. The United States has the highest gun ownership rate in the world and the highest per capita rate of firearm-related murders of all developed countries. ( http://www.washingtonpost.com/wp-srv/special/nation/gun-homicides-ownership/table/ ) I wish someone will care to or dare produce data to show how many these killings were in self defence - for which free ownership of guns is advocated. It may be also worthwhile to do some research on how many films would Hollywood make, if it was prevented from portraying violence involving guns. I believe the film industry in most countries will be reduced to insignificance, should there be a ban on scenes involving guns, narcotics, liquor, etc.

While stock markets have been avowedly created to promote savings and enable the small savers to invest in the real growth of the economy and benefit from it, these markets have hardly ever served the stated objectives. The real contribution of speculative markets of all kinds has been infusion of unwarranted volatility and frequent derailing of economic progress. Speculative institutions and activities have been primarily responsible for cancerous growths in many economies as manifested in mounting public debt, widening gap between the rich and the poor and heavy underutilisation of productive resources. https://www.linkedin.com/pulse/20140718210034-17589031-healthy-vs-unhealthy-economic-growth Yet, economists including those like Prof. Shiller would rather advocate better control and not the abolition of speculative activities that eat in to the vitals of these economies.

It is time for economists to stand up and gracefully accept their mistakes and the wrong advices that they have been giving to governments. As of now, economic science remains completely obfuscated on the one hand by the use of zero sum mathematical models to the non zero sum economic phenomena and on the other by the veil of money, which hides the undercurrents in the real economy from the eyes of people. Blinded by mathematical models and monetary delusions, most economists invariably behave like the five blind men, who ended up describing the elephant based on the different parts of the elephant, which they were able to touch and feel. There is as yet no attempt to develop a holistic understanding of the real economic challenges facing the world.

Economic science has also fallen a victim to wanton oversimplification and convenience seeking. While economic progress depends on what happens in the real economy, people are becoming fascinated by the prospects of remote controlling the real economy through monetary instruments. While monetary remote controls have proven their penchant for damaging economies, these have been least effective in helping the economies out in troubled times. We are in 2015 and monetary machinations have been of no avail ever since 2008. This fact alone should wake up everyone and give them a sense of how futile it has been and it will be to rely on financial instruments to do the trick. There are no magical wands in real economics. Economic growth is all about keep producing more and more of goods and services and people keep buying more and more of goods and services with the help of incomes received from producing more. Monetary machinations can certainly disrupt the process, but will never be able to put the real economy back on its rails.

Just like there will be no gun control, there will be no control on speculation and all other vices that go with it. Economies might go to dogs but who cares since the rich will always find newer ways to make money even when the economy is going downhill.
- Bruce Glick Feb 11, 2016
  
  @MAJ Jeyaseelan Please do some homework on gun control and violent crime.
  
  E.g. Vermont gun ownership ~50%, murder rate .o3/100k. Wash DC (similar population) gun ownership <4%, murder rate ~ 16/100k. This despite DC having strictest gun control laws.
  
  Here is politically incorrect fact: If you factor out the murder rate of young black men (24 and under), the murder rate for the US would be middling among advanced nations. The murder rate among young black men is as high as the worst 3rd world rates. Facts, not emotion or PC bs. Conclusion: our problem is black on black murders especially among young black men. And drilling down on the data points clearly to where this problem is acute. Of course we aren't allowed to profile. Sadly, those who suffer from this pc bs are innocent black people in these dangerous neighborhoods.
  
  More Obama bs is comparing the number of "gun violence" deaths to auto accident deaths. Two thirds of these gun violence deaths are suicides, which have nothing to do with firearm related murders. Moreover, the suicide rate for the US is middling for advanced nations and much lower than many advanced countries with very strict gun laws. Point being suicides in US will not decrease with gun control laws. Conflating suicides with murders is a canard designed to fool the gullible public.
  
  I took this information directly from US Govt (FBI crime data) sources. It's easily available on the internet and I encourage you to dig through the data yourself.
  
  Your conclusion that highest gun ownership rate and highest gun murder rate proves that guns are the problem shows that you do not understand basis statistics. Your mistake is assuming that gun violence is evenly distributed among all gun owners (and that owning a gun somehow increases the willingness to commit murder). Drilling down on the data shows that is clearly incorrect. A book you might want to consider is "Statistics Done Wrong" by Alex Reinhart.
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suresh tyagu Sep 21, 2015

Not just Phishing but news channels and advertisement also contribute to persuasion of things which are worthless. So we come across lot of things which we at some point of time if we would have had money thought we would have bought.
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Hari Rao Sep 21, 2015

An example i would cite is of the housing market in cities in India , the way they are marketed and priced is so Asymmetrical that you become a great target for phishers to sell you the idea of a dream home at an exorbitant price by way of borrowing at high cost
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Hari Rao Sep 21, 2015

It is Absolutely not a shallow article, It is Quite deep if you step back and reflect .Infact Shiller and Akerlof have brought phising out in open ,especially what they say of "Borrowers are lured into unsuitable mortgages; firms are stripped of their assets; accountants mislead investors; financial advisers spin narratives of riches from nowhere; and the media promote extravagant claims" is so true. The complete lack of transparency and the asymmetry of information that exists in the way the government or the corporations work is making consumers and public at large vulnerable to the forces beyond their control
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Mark Phillips Sep 21, 2015

Agree, the market cannot decide what is useful, and plenty of things that aren't useful can divert important environmental and labour resources away from acitivities that would better suit society. For example, if the entire economy was geared to entertainment, assuming our endless desire to have fun, then clearly we'd starve to death. Likewise, if the entire economy is geared to a small majority having fun, then again we'd starve.

Those person years are precious. What's the cost in well-being of devoting them to sustaining a disposable society? Society struggles to have enough people doing valuable work, so what is the cost of having a market that has no incentive to being responsible producers? What's the cost to society of having a consumer base that isn't responsible enough to understand the lack of utility behind their consumption? Hmm - build a better world or lose myself in distractions? That's the big question, and the market is all too capable of filling our lives with useless distractions while people don't have adequate shelter or even proper diets!

We've been individualising the problems of society to the point where we say it's an individual's responsibility to be healthy, even while the market works night and day to feed an unhealthy lifestyle - because of course, in many ways it appears easier, and the costs are often hidden.

One thing you haven't really mentioned Robert in conjunction with the Phishes is the deliberate intention to transfer risk - profit in one direction, risk in the other. The Phish serves as a perfect vehicle to transfer high risk to someone else. The market works reasonably well as an 'insurance' against the fluctuations in supply and demand, in that it distributes the risk such that isolated stresses in the market don't collapse parts of the market, but if that distribution of risk is too heavily skewed away from the capital that should sustain it, then part of the economy will inevitably collapse when part of the market is strained.
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Ingolf Eide Sep 21, 2015

Yes Andrew, shallow indeed. Based on the occasional article of his that I read, the quality of Schiller's output seems to have been on a downward path for many years.

To take but two examples from this piece:

- In recent decades, moral hazard and irrational exuberance aren't either/or alternatives; they're Siamese twins. Without continual credit expansion, underpinned by an awareness of staunch central bank support, the serial lunatic episodes of the last 15-20 years couldn't have happened.

- One can accept that immediate intervention was useful when the crisis hit without approving of the means adopted. Its purpose should have been to prevent the financial system from collapsing whilst at the same time enabling its transition into a more rational structure. Lots of bank resolutions, for example, with debt converted to equity. Certainly, dubious private sector debts should never have been transferred to public sector balance sheets. And so on.

All in all, a disappointing piece.
- Ingolf Eide Sep 22, 2015
  
  José, I did say credit expansion, not that monetary expansion pre-crisis was exactly lacklustre either.
  
  You're probably familiar with the figures but just as an illustration for those who aren't in 1975 total US credit market debt/GDP was 160%; in 2005, it was 332%. Financial sector debt/GDP was 16% back then versus 104% in 2005.
  
  On your second point, if I've understood you correctly, no argument. I'm very much with Schiller when it comes to behavioural finance. As an aside, I'm not sure what you were getting at in your final bracketed point, if you feel inclined to expand on it.
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- Jose araujo Sep 21, 2015
  
  Ingolf,
  
  I think you are a bit confused. The financial crisis pre-dates monetary expansion by some time. Actually monetary expansion was an answer to the financial problems, and not the opposite.
  
  Second, Shiller is a/the main critic of the efficient market theory, which goes far beyond Moral Hazzard and Irrational Exuberance (which IMHO are suns of the efficient market theories).
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John A Werneken Sep 20, 2015

Far better to suffer near-universal catastrophe of brief duration and move on, without the permanent harms done by public intervention. the 1950s and sixties happened because, not in spite of, the 1930s.

People who lend to those who van not pay, people who buy or borrow assets of dubious lo ng term value, screw them. And screw those who rely on them. Kill the phools lol, never mind the phishes.
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Nat Scientist Sep 20, 2015

Moral hazards are engineered by pfisher apologists who fail to decry the regulatory scheme narratives while providing themselves a healthy income like the celestial mechanic trade before Galileo whacked them all to back to hell with his telescope.
What's not made to last ought be made last.
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John Doyle Sep 20, 2015

Whatever happens to set off the next financial crisis.it will end badly. There will never be another boom and the deflation bugging us now will never go away. This is IMO because of resource paucity. We spend more and more effort on less and less results. The giant debt overhang is masking the problem and we continue to live well, bt well beyond sustainable means. Phishing only makes it worse and the Phools, or suckers delude themselves.
No matter how fast governments intervene[and right now there are no contingencies in place, nothing "shovel ready"] it will only be atemporayr reprieve. The end of this civilization has always been ordained and there is no stopping it. We will do our damnedest to string it out as long as possible, but that grim future is reeling us in every day. There is no escape. We have left it too late. We went into overshoot in 1971 That was our last opportunity .
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Milton Churchill Sep 20, 2015

What a shock. Two Marxist academics think the problem is capitalism, again. LOL
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David Myers Sep 18, 2015

Having read only this article, not their book, I don't know if or how George A. Ackerlof and Robert J. Shiller painted a background or reasons for their scenario. I can only guess at their solution to the problem of phishing phor phools.

But in their many statements they imply or even assert that (government) intervention should be immediate and forceful.

Apparently these “mainstream economists” don't actually advocate “phree” markets but “phettered” markets instead. Gone are the days of the early pioneers who lived with little and sometimes no intervention from government. Nowadays, however, it seems as if almost everyone has been brainwashed to think “there oughta be a law.”

Well, there is a law. It's called “natural law, the laws of Nature and the Universe.” These laws include such as: Caveat Emptor [Let the buyer beware!] and Caveat Venditor [Let the seller be responsible!] Even backwoods colonists memorized “Fool me once, shame on you; fool me twice, shame on me.”

In our country, famed for its advocacy of individual freedom and responsibility, cannot we assume the overwhelming majority can take care of themselves? Otherwise Ackerlof and Shiller really seem to be saying, “Americans are a bunch of phools and sheeple who need elites such as we to guide and protect them with our invocation of government power.”

I haven't read or studied all the “mainstream economists,” but I've read enough to understand that few actually advocate real, true free markets; markets in which government is permitted to intervene solely to thwart crimes such as fraud, theft, extortion, and unprovoked violent physical aggression.

“Mainstream economists,” along with lots of other wrong-thinking people, seem to believe that it is perfectly legitimate for governments to specify and control what is used as money and be its sole source. They also seem to believe that it's government's job to regulate and control businesses so they can be honest and fair on a level playing field.

Anyone who has studied the history of catallactics and money knows that money is a meme that was “discovered or invented” by traders in the marketplaces of the world. Governments seized control of money because it was highly profitable. Those who are in on the plunder gain the benefit of being the “early spenders” of the USA's ever-expanding “money supply.” They also “bailout” their blundering buddies by billing the taxpayers for all their mistakes and thefts. Guess who gets a “piece of the action.”
FOLLOW THE MONEY.

George A. Ackerlof and Robert J. Shiller Phising for Phools, The Economics of Manipulation and Deception.
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Lee Slota Sep 18, 2015

I don't quarrel with Schiller's point that a response was necessary and simply letting the crisis run its course would have been disastrous, but I feel too many resources were devoted to helping the phishers and not enough to helping the phools.
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R D Sep 18, 2015

Shiller's ideas are always worth serious thought. Here is another thought: " ... doing away with fire departments, on the grounds that without them people would be more careful – and so there would then be no fires." Why not amend that to say, " ... doing away with FEDERAL fire departments"? Perhaps a state, municipal or private fire department would be better. Perhaps lower levels of intervention, or private damage control, would reduce moral hazard without costing taxpayers so much.
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G. A. Pakela Sep 18, 2015

One could make the case that the first "dark age" of the decade long Great Depression was prolonged by public policies that deliberately distorted markets - excessive tax rates, interference in prices and agricultural production, efforts to gain more centralized control of the economy. There is no doubt that the Fed back then should have provided immediate liquidity to the economy to staunch the bleeding of bank runs and the liquidation of borrowers, lenders and depositors alike. Similarly, the first QE program was necessary, but the subsequent rounds of bond purchases have grossly distorted financial markets, hurt public and private pension and savings and contributed to an atmosphere that where caution prevails over optimism and animal spirits - necessary to propel the next round of investment and job creation.
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Robbie Jena Sep 18, 2015

Looks like unlike our Police Forces, we do not have serious Government institutions who work on this everyday...even though we have serious NSA Knowledge Management systems. Does the Chinese in to the same in their country? I wonder...
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Jose araujo Sep 18, 2015

Always a pleasure to read Shiller.

Now whats amazing is that the axioms of a model are assume by many has truths and require dis-proving (sp.)

Axioms are necessary conditions for a model to have significance, and they are axioms because when building the model it wasn't possible to prove them.

What this models consider irrational exuberance are the observed behaviors. For sure we are not all "rational" and even if we were, the aggregation of this behaviors only by luck would produce a rational outcome.
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jagjeet sinha Sep 18, 2015

Democracy requires debasement - the Gold Standard was its Damocles.
Democracy requires hope to be retailed.
Democracy requires debts to create assets - wealth to be factory produced for retailing.
And Assets must have prices that exceed the accumulation of debt.
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Procyon Mukherjee Sep 18, 2015

When the world seems to be settling on easy money, which by the way is no panacea for growth, this short treatise is a reminder that the rigged game has some smart winners, who make money at the cost of the others who keep maintaining their foolhardy poise. It might seem irrational, but that is so indeed that buyers and sellers , with almost no emotional attachment to what they buy and sell, keep helping the intermediaries to make money at their own peril.

Is there not enough evidence that the real long term return of any fund never exceeds the cost of capital after taxes and fees? So
all that matters is timing for a very few of them and while the intermediaries make hay all the time.
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More Freedom Sep 18, 2015

It seems simpler to compare 1) marketing which is essentially teaching customers about your product/service, 2) fraud where people make promises that are untrue.

Then to distinguish between government that protects us from fraudsters, and government that engages in fraud by say counterfeiting money or taking money from some for the benefit of others (e.g. Fed actions that fatten banksters wallets at taxpayers expense).

The difference is that no one regulates/prosecutes those in government who engage in theft, rather than protecting our lives, our property and our liberty. There are certainly people in and connected to government, who manipulate and deceive, to make themselves very rich.
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Michael Public Sep 17, 2015

Problem with 'free reign' is you are giving it to people elected by the very people who caused the disaster. Reserve bank governors are elected by banks, and politicians get to play ball and run if the banks contribute to their campaigns. It is like asking the fox to guard the hen house and when there are chickens missing assert he should be given greater powers.
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Vanishing Leprechaun Sep 17, 2015

A Nobel laureate who believes to the “invisible hand” (supposedly) by the poor Adam Smith!
In the Adam Smith texts there are only three occurrences of this expression.
Please read them into their contexts and check if any one of these do support the “current” (i.e. vulgar) interpretation.
None of them. It is a “a posteriori” interpretation for the sake of oneself political purpose.
Texts, books, even trivial letters must be read and interpreted into their social, historical, cultural context. Adam Smith lived in the second half of XVIII Century, a context quite different from ours, he wasn't our brother or cousin, nor the Milton Friedman' cousin.
And this is a well know topic into the history of politics and economics thinking.
Of course, there are scoundrels, bribers, and so on. In the '20s, wealthy Wall Street investors used to make “Pools” to build bubbles and cheat the stock exchange newcomers: the “middle class”, which for the first time in history became a fresh army of naives traders from which easily extract money.
But doesn't exists - and never existed - any magic “Invisible hand”, which is merely the outcome of a “cultural” Pool.
https://en.wikipedia.org/wiki/Invisible_hand
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Marc Sargen Sep 17, 2015

When has any of this be new or excessive. Caveat Emptor was around for Millenniums prior to Smith coining his invisible hand.
The invisible hand assumes that there are plenty of crooks, frauds, hucksters, & fools. It does not equate equality or perfection. What it does imply it that is's much harder to fool an entire market that is it to pump & for a few people who make decisions in a centrally planned economy or hype the public so few "bright" people make a hasty, biased, short sighted intervention in the best interest of people they've never met but "know" that they're mindless fools.
Despite all the work to stop "irrational exuberance" it is occurring more & more frequently. Delusion of control will cause any pan to fail miserably because it has not basis in reality.
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Andrew Newallo Sep 17, 2015

But if we were all perfect, without the flaws that humans struggle with each day, then the market would not be competitive.

What a shallow essay.
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M M Sep 17, 2015

We live in a globalized economy. There are people with an electronic gadget not worth more than few bucks and dealing with billions. I would question the legality and practicality of your proposal to give “free rein to fiscal and monetary authorities to take aggressive steps when financial turmoil turns into financial crisis”. And who is best qualified to determine when a financial turmoil is a true financial crisis and not just phishing? And who will have such an authority to trigger such a mechanism among multiple jurisdictions and functionaries? And who will assume responsibility for any action taken that may turn out later that it was not warranted because the incident in question was a hoax and not a true financial melt-down and who will pay for the damage caused, the authorities or the markets? How about this guy in the UK that is called Nav Sarao that is accused of crashing the Dow Jones in May 2010? He is claiming innocence and no wrong doing, whilst the US regulators are after a conviction. The five main central banks have gone a long way since the 2008 financial crisis and are now introducing “early warning mechanisms”, this however may still not be enough, but nothing is ever 100%.
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dan baur Sep 17, 2015

"some now argue that the fiscal and monetary authorities should not have responded so quickly or strongly when the 2007-2009 crisis erupted" - this is the first time I read this.

The more familiar criticism is that interventions were pro-cyclical before the crisis and the "aggressive steps" should have lasted way less than the ongoing 7 years after the crisis. The worry is that all this continuing intervention is actually damaging the economy rather than helping it.

Since you use this analogy, epidemics are best treated with preventive measures including vaccination that builds immunity. Does our economy have any immunity to destabilizing agents? Or has it been rendered more fragile than before by the never ending interventions?
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