Opinion

Chrystia Freeland

Robert Shiller: We are not in the clear

Chrystia Freeland
Dec 2, 2010 17:37 UTC

Robert Shiller of Yale University is #48 on Foreign Policy’s list of the 100 Top Global Thinkers of 2010. He tells Chrystia that his big idea is that “finance can serve humanity, especially if it democratizes.” In fact, Shiller argues that the spread of finance is responsible for the super-cycle of economic growth that the world has enjoyed over the past half-century. He disputes the charge that finance is mainly beneficial to a small cabal of bankers in the world’s financial capitals.

Over half the population of the United States uses mutual funds, retirement plans and complex mortgage contracts to manage risk. And, risk-management techniques could be expanded to include more of the uncertainties of middle-class life, he says.

Professor Shiller has two big ideas in the pipeline: a book that will address the popular prejudices against finance and a book to be co-written with George Akerlof on the future of international financial regulation.

Here’s Foreign Policy’s take on what makes him a top global thinker:

If there is one financial indicator that has defined America’s current economic malaise, it’s home sales. And if there is a man who has defined that indicator — literally — it’s Robert Shiller. As the co-creator of the go-to reference on the subject, the S&P/Case-Shiller Index, the economist has become the world’s most important housing guru. A decade after famously warning that the dot-com boom was just so much “irrational exuberance,” he was among the first to predict that the housing bubble would pop, and he has spent the last two years saying that we’re not in the clear yet.

Shiller’s unconventional brand of economics — he cites his wife, a psychologist, as a major influence on his thinking — has left him skeptical of optimistic recovery scenarios drawn from past downturns such as the 1990s Asian crash. As he put it in September, “Hopes that the aftermath of the current crisis will turn out better are still in the category of thoughts, theories, and dreams, not science.”

Dan Ariely’s new mission: stomping out conflicts of interest

Chrystia Freeland
Dec 1, 2010 20:47 UTC

At the end of Chrystia’s interview with Dan Ariely yesterday, he revealed that his next research priority is to demonstrate how pernicious conflicts of interest really are:

My personal mission is to think about conflicts of interest. So it turns out that if I pay you lots of money to see reality in a certain way, you too will be able to do it … It turns out conflicts of interest paint us. They paint our view of the world in deep ways that we don’t understand. So imagine I pay you $5 million a year to view mortgage-backed securities as a good product. Now, I’m sure you could pretend to like them, but the question is would you really start believing that they are better products than they really are? And that’s the case. We find that people actually can change their deeply held beliefs. They would invest their own money. If something is worthwhile for you to do financially, you would convince yourself that this is also good for you. And if it’s something that is difficult and complex, it turns out it’s even easier for us to do it. And if it’s something that is remote from money — for example, in our experiments when we get people to cheat for something that is not money but a step removed from money — stock, stock options — people find an easier time doing that. So my big issue right now is to try to eliminate conflicts of interests. When you have a situation with conflicts of interest and you put good people in those conditions, you should not expect anything but failure.

As Ariely tells Chrystia, this is a problem not just limited to finance. Doctors and politicians can lose their ability to objectively see reality through their contact with drug reps and lobbyists, he says. And while he’s not wide-eyed enough to believe he could eradicate them completely, Ariely does think conflicts of interest can be dramatically reduced.

Foreign Policy Global Thinker: Daron Acemoglu

Chrystia Freeland
Dec 1, 2010 18:48 UTC

Daron Acemoglu of MIT is #88 on Foreign Policy‘s list of the 100 Top Global Thinkers of 2010.  Acemoglu tells Chrystia that his big ideas involve “the relationship between democracy and development” and “the historical roots of economic success and political success, and unfortunately also economic failure and political failure, across nations.”  Professor Acemoglu explains why he disagrees with modernization theory, which states that nations tend to democratize as they get richer. He also disagrees with the thesis of fellow FP Global Thinker Raghuram Rajan that income inequality was a root cause of the most recent financial crisis.  Acemoglu also discusses the prospects for democratization in China, and Russia’s project to replicate Silicon Valley outside Moscow.  His next big idea, he hinted, is exploring the relationship between individualism and society.

Here’s Foreign Policy‘s take on what makes him a top global thinker:

Some Nobel Prize selections are a genuine surprise. The same won’t be true if Daron Acemoglu, already at age 43 one of the world’s 20 most cited economists, eventually takes the award. Born in Turkey and educated at the London School of Economics, Acemoglu quickly made a name for himself with papers and monographs that examined how economic incentives align with political life. His specialty is the analysis of the political conditions under which markets thrive — namely, democracy. It’s a theme Acemoglu has explored in a steady stream of academic papers, textbooks, and op-eds — work that so impressed his peers that he won the John Bates Clark medal in 2005, given annually to an outstanding economist under age 40. Acemoglu’s next book, co-authored with Harvard University’s James Robinson, Why Do Nations Fail?, argues that a real “freedom agenda” will start with democratic rules rather than free markets. “You would not need armies to implement such a scheme,” Acemoglu said, “just a functioning bureaucracy.”

Dan Ariely: How to fix Wall Street

Chrystia Freeland
Dec 1, 2010 16:53 UTC

Dan Ariely, author of “The Upside of Irrationality,” has some (unsurprisingly) unconventional recommendations for restoring the health of the financial system and fixing Wall Street pay. He told Chrystia that the government’s effort to recapitalize the banks and restore liquidity to the financial system are half-hearted since it has done little to restore trust in the industry:

I think what is really dangerous is the feeling of mistrust and revenge towards bankers. People at AIG have told me that they’ve been punched — physically, people punched them in restaurants. There’s a deep mistrust. And what’s interesting is that people are inherently trusting creatures, but when our trust is being betrayed we get incredibly upset and willing to take revenge … Now, I think the banking industry in general, and also Washington, don’t understand how deep the trust has been betrayed. And what we need is not just to increase liquidity and not just to create sunshine policy. What we need is to restore the trust in banking, and unless we do that I don’t think things will truly recover.

Ariely mentions an experiment he calls the “trust game” that illustrates how vindictive people become once they feel betrayed. It involves two players: A and B. Player A is given $100 and is told he can either go home with the money or send the money to Player B. If he sends the money to Player B, the $100 will quadruple to $400. If the money gets to Player B, he could either go home with the $400 or split the money 50-50 with Player A.

Video: The next big ideas of six financial luminaries

Chrystia Freeland
Dec 1, 2010 15:49 UTC

In conjunction with her essay in Foreign Policy‘s Top Global Thinkers issue, Chrystia interviewed six of the financial luminaries that made the list:

MIT’s Daron Acemoglu, Yale’s Robert Shiller, PIMCO’s Mohamed El-Erian, Columbia’s Joseph Stiglitz, the University of Chicago’s Raghuram Rajan, and NYU’s Nouriel Roubini.

Reuters and Foreign Policy will be showing these interviews over the next coming days.  This one is a compilation of the above six global thinkers.

Americans favor more income equality

Chrystia Freeland
Nov 30, 2010 22:52 UTC

Behavioral economist Dan Ariely of Duke University came into Reuters today to talk to Chrystia about his new book and some of his recent research on income inequality.

Ariely, along with Michael Norton of Harvard Business School, conducted a survey to determine what level of inequality Americans tolerate if their incomes were randomly assigned, an equilibrium that philosopher John Rawls called the “just society.” The duo asked nearly 6,000 Americans to guess what percent of wealth they thought was owned by each of the five quintiles of income levels in the United States and what their ideal level of income distribution would be. Then, Ariely and Norton presented the respondents with three unlabeled charts showing–unbeknownst to them–the distribution of income in a perfectly equal society, the United States, and Sweden, respectively, and asked which society they would choose to live in.

The results were quite shocking:

First, respondents vastly underestimated the actual level of wealth inequality in the United States, believing that the wealthiest quintile held about 59% of the wealth when the actual number is closer to 84%. More interesting, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution, reporting a desire for the top quintile to own just 32% of the wealth

‘We can’t say they didn’t warn us’

Chrystia Freeland
Nov 29, 2010 17:54 UTC

Chrystia wrote an essay for Foreign Policy’s Top 100 Global Thinkers Issue on the economists and financiers whose ideas survived the financial crisis:

In a letter to shareholders written just after the dot-com bust, Warren Buffett observed, “You only find out who is swimming naked when the tide goes out.” The 2008 financial crisis had a similar effect on our economic and financial gurus: It revealed whose thinking was based on whiggish, End-of-History assumptions about the essential triumph of Western democratic capitalism and whose mental framework admitted the possibility of radical disruption. The thinkers whose intellectual — and maybe even psychological — starting point was that Western market democracy is neither perfect nor eternal turned out to be much better at foreshadowing the financial crisis, and it is those thinkers whose ideas are the most relevant today, in the uncertain, post-crisis world.

These specialists in uncertainty are a broad church: They range from academic economists who saw the crisis coming, like New York University’s Nouriel Roubini and the University of Chicago’s Raghuram Rajan, to philosophers of finance like George Soros and Mohamed El-Erian, who have made huge market bets, as well as intellectual ones, on how bubbles are formed and how they burst. One striking similarity between many of them is that they have seen regime change up close.

America’s culture of no

Chrystia Freeland
Nov 26, 2010 14:49 UTC

Saying ‘yes’ is one of the dominant tropes of American life. America’s favorite politicians are the sunny optimists: think Ronald Reagan and “Morning in America.” In fact, the culture is so insistent on looking on the bright side that, as Barbara Ehrenreich complained in a recent book, injunction can be heard on the cancer ward. You might even say — and some historians have — that Americans themselves have been pre-selected for their optimism: you or your ancestors had to have a powerful faith in the New World and the opportunities here to make the trek over in the first place.

That’s why when I interviewed Nikesh Arora, Google’s head of sales, operations and business development at a media conference last week, one of his comments had particular resonance with the live midtown Manhattan audience and in the blogosphere shortly afterwards. Google, Arora said, works hard to create “a culture of yes.”

Arora described the Google approach as an “inversion” of the attitude in more traditional companies, where “everybody in management is trying to look at where the flaw is when somebody is presenting. Everybody is trying to figure out what’s wrong with their plan.” At the Googleplex, by contrast, “we’re going to say what’s right with it, let’s find a way to say yes.”

Where distressed investors should look

Chrystia Freeland
Nov 22, 2010 16:56 UTC

At last Friday’s Wharton Private Equity Partners Distressed Investing Symposium, Chrystia interviewed Mark Gallogly, co-founder and managing principal at Centerbridge Partners, a private equity and credit investment firm with $12 billion in assets under management. Gallogly said finding good opportunities in the distressed sector has become tougher as the “wall of maturities” (the point in time when debt must be refinanced) has been pushed further into the future, thanks to the booming market for corporate debt.

He notes, however, that the wall has been extended mainly for bank notes and senior debt; not for securities that are subordinate on the capital structure, like junior debt. So distressed investors should keep an eye out for situations in which a corporation’s junior debt matures much earlier than its senior debt:

Aside from buoyant bond markets, Gallogly said private equity also faces a challenge of dealing with an abundance of capital at a time when interest rates are reversing their long-term downward trend:

Google’s culture of yes

Chrystia Freeland
Nov 19, 2010 16:25 UTC

Nikesh Arora, Google’s President of Global Sales Operations and Business Development, spoke to Chrystia yesterday at a panel during the Paley Center for Media’s November International Council meeting. Arora explained how Google is able to keep its garage-workshop spirit of innovation even as the company swelled to 20,000 employees. The key, he said, was to establish a “culture of yes” where the default option is for management to approve employees’ new ideas andprojects rather than trying to nitpick and say no. Several of Google’s most recent initiatives, from driverless cars to a new offshore power grid to promote wind power, were the byproduct of this bottom-up process.

In response to Chrystia’s question about whether Facebook’s new e-mail service will steal users away from Google, Arora said the “internet is not a zero-sum game.” He predicted that in five to eight years, 80 to 90 percent of people’s time will be spent on internet-enabled devices, and in such a world, it would be impossible for any one company to dominate all online behavior.  Arora foresaw a future in which there are 15 to 20 players that provide the most popular online services, and that he would include Google and Facebook in that list.

Finally Arora shared his outlook for what areas Google is investing in most heavily.  He said the company’s focus on advertising, while sizable, is aimed only at the 10% of the $600 – $700 billion ad market that is online.  In five to eight years, he predicted 30 to 50 percent of the ad market will shift to online.  Google will be poised to take advantage of that shift, as well as the shift to personalization and interactivity in ads that will occur in the near term.

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