For professor Robert Shiller, there is a conversation that must be had about finance. After teaching the course “Financial Markets” for about 25 years and seeing it uploaded on Open Yale Courses in 2008 and again in 2011, he said he felt responsible for ensuring that his students understood the morality behind their career choices. His book “Finance and the Good Society,” published March 20, aims to answer questions about the virtues of the field.
“I was worried that I was preparing young people for a career that was morally challenged,” Shiller said. “I wrote the book for my students. I didn’t know what else I would assign on that. I had to discuss basic moral issues that all of these people are going to confront in their career.”
Shiller said finance in its simplest form coordinates people and resources, a task that is essential for the functioning of the economy. He said that coordination will be critical for the progress of developing nations in the years to come.
“The world is being transformed by finance right now,” Shiller said. “The emerging world is growing at an extremely rapid pace. I think finance is indispensable to the advance of civilization.”
Professor Jeffrey Garten, who teaches “Understanding Global Financial Centers” at the Yale School of Management, said working in finance can be socially beneficial in addition to being lucrative for its practicioners. Future investments in American manufacturing, developments in alternative energy and improvements in education all rest on financial underpinnings, he said.
“It is a socially redeeming activity to create value by merging two companies that can do better than either alone; it is a socially redeeming activity to help a country restructure its debts so that it can better provide for its citizens; it is a socially beneficial activity to help people manage their money so that they can have a secure retirement,” Garten said. “There are many aspects of our country which would never have happened without smart capable financiers.”
But the current state of finance is unsustainable, and the financial sector must reimagine itself, said economics professor John Geanakoplos ’75, who teaches “Financial Theory.” Geanakoplos said Americans now have to “rein in” the financial sector, whose out-of-control activities caused the financial crisis of 2008.
Regulation — both self-regulation and regulation by the government — will be necessary for finance to succeed, Shiller said. Otherwise, Wall Street may see a “race to the bottom,” where finance firms feel forced to do “sleazy business” in order to compete with their peers, he said.
Geanakoplos suggested regulating leverage as an important first step. Prior to the Great Recession, the Federal Reserve paid little attention to leverage rates in favor of a more free-market approach. However, he said, there is no reason to believe the economy can gauge the right level of leverage, so the Federal Reserve should step in.
“The Federal Reserve needs a complete rethinking on what its mission is and how best to achieve it,” he said. “Financial stability should be a priority instead of just full employment and moderate inflation.”
Garten predicted that financial industry would shrink in size in the future, which would be a positive development because the oversized finance sector was prone to crises.
“In the future, I expect that financial services will be a smaller part of the economy than they have been in the last decade,” Garten said. “To me that is a good thing. I do believe there have been excess banking and excess financial capacity, and this has been part of the problem.”
It would be a healthy development, he added, if more students pursued careers in production rather than financial services.
For years, Americans have considered finance an easy and morally sanctioned way to get rich. But last month, Goldman Sachs employee Greg Smith published a public resignation letter in the New York Times, calling the large investment bank’s culture “toxic” and declaring many of its employees to be “morally bankrupt.”
There are both good and bad people in every organization, Shiller said in response to questions about Smith’s letter. He said that any consideration of morality needs to take into account how bankers spend the money they earn, and he lauded Goldman Sachs’ chairman for his philanthropic contributions and activism in social causes.
“There probably are people who are still criticizable, and maybe the organization needs a refreshment of its principles, but it’s not black and white,” Shiller said. “I think there’s a lot to admire in Goldman Sachs.”
The debate over finance’s moral implications bears particular relevance for Yale students, who often feel the field’s lure. In 2008, 26 percent of Yale students were employed in business or finance one year after graduation, though that number fell to 14 percent in 2010. The stagnant economy might prompt some students to go into finance, but others to go into other economics-related fields instead, Geanakoplos said.
“The greatest generation of economists emerged after the Great Depression, and I expect to see a similar wave right now,” Geanakoplos said. “There’s obviously something wrong with how our economy works now, and whenever an area is in disarray, it’s an opportunity.”
Mary Liu ’12, director of corporate and campus relations for the Yale Undergraduate Economics Association, said that much of the current distaste for finance stems from a sensationalist media. Especially in the aftermath of the financial crisis, the media used overly dramatic rhetoric to discuss the economy, she said.
A strong financial services industry is necessary for a developed economy, she added, and as long as the financial sector practices transparency in its actions, students should not feel qualms about entering the field.
“Go into finance if you enjoy it and stick to your principles,” Liu said.
Shiller said he wished that more students from fields other than economics, such as engineering and the sciences, would take his course, because many career paths involve finance in some way. One argument he makes in his classes, he said, is that those who make money in finance have a moral obligation to give some of it back in philanthropy.
Shiller said he hopes that “Finance and the Good Society” will address these issues and give students the ethical background to approach careers in finance.
“I don’t whitewash it,” Shiller said. “The ethical standard has deteriorated recently. The anger in the public view is not entirely unwarranted, but I think it will come around. There is a healing process after this crisis.”
Shiller will teach “Financial Markets” in the fall.