1.はじめに」と「このコースがあなたとあなたの目的のために何をするのか (1. Introduction and What this Course Will Do for You and Your Purposes)

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PROFESSOR ROBERT SHILLER: OK.
Welcome to Economics 252.
This is Financial Markets, and I'm Robert Shiller.
This is a course for undergraduates.
It doesn't presume any prerequisites except the basic
Intro Econ [Introductory Economics]
prerequisite.
It's about --
well, the title of the course is Financial Markets.
By putting "markets" in the title of the course, I'm
trying to indicate that it's down to earth, it's about the
real world, and, well, to me it connotes that this is about
what we do with our lives.
It's about our society.
So, you might imagine it's a course about trading since it
says "markets," but it's more general than that.
Finance, I believe, is, as it says in the course
description, a pillar of civilized society.
It's the structure through which we do things, at least
on a large scale of things.
It's about allocating resources through space and
time, our limited resources that we have in our world.
It's about incentivizing people to
do productive things.
It's about sponsoring ventures that bring together a lot of
people and making sure that people are fairly treated,
that they contribute constructively and that they
get a return for doing that.
And it's about managing risks, that anything that we do in
life is uncertain.
Anything big or important that we do is uncertain.
And to me that's what financial markets is about.
To me, this is a course that will have a philosophical
underpinning, but at the same time will be
very focused on details.
I'm fascinated by the details about how things work.
It can be boring, and I hope I'm not boring in this course,
but it's in the details that things happen.
So, I want to talk about particular institutions, and
I'm interpreting finance broadly in this course.
I want to talk about banking, insurance.
Sometimes people don't include insurance as part of finance,
but I don't see why not, so we'll include it.
It's about securities, about futures markets, about
derivatives markets, and it's going to be
about financial crises.
And it's also about the future.
I like to try to think about the future, although
it's hard to do so.
Where are we going?
This course will have a U.S. bias since we live in the
United States.
I know the U.S. better than any other country, but at the
same time, I recognize that many of you, or even most of
you, will work outside the U.S., and so it's important
that we have a world perspective, which is
something I will try my utmost to incorporate in this course.
The world perspective also particularly matters since we
have other viewers for this course besides those
people in this room.
This course is one of a couple dozen courses that Yale
University is offering free to the world as
part of Open Yale.
And that means there's a cameraman back
there if you've noticed.
That's Dan Cody filming the course.
And it will be eventually posted on the internet and it
will be available through Open Yale, and then by
proliferation, you'll find it on many
other websites as well.
This is the second time this course has been
filmed for Open Yale.
The first time was in 2008, three years ago.
And I'm very pleased to report that I have a lot of people in
every imaginable country who have watched these lectures.
And I get emails from them, so I know that they're out there.
But I thought that this course needs updating, probably more
than any course on Open Yale.
You know, a course in physics only has to be updated for the
last three years of research in physics, and it's probably
not a big thing for an undergraduate course.
But finance really has to be updated, I think, because it's
going through such turmoil and change right now.
We've had the worst financial crisis since the Great
Depression, and it's been a worldwide crisis.
And governments around the world are working on changing
our financial institutions.
We have organizations of governments, notably the G-20,
which is very involved in finance.
It's one of the top items on their agenda for international
cooperation, it's changing our financial markets.
So, I think that that's another reason why I want to
try to keep as international a focus as I'm good at doing in
this course.
But I hope that those of you who are in this room are not
disturbed by the camera and feel you can ask questions.
You don't have to be on camera.
I think I'm just being filmed.
So, that's where we are.
Now, I wanted to put this in a little bit broader context.
The other major finance course that we have here at Yale is
Economics 251 and it's taught by Professor John Geanakoplos,
who is a mathematical economist and also a
practitioner.
He's research director for Ellington Capital.
So, he's somewhat like me in that he's interested both in
theory and practice.
But his course is definitely more theoretical and
mathematical than mine.
His is entitled "Financial Theory." And I can read some
of the topics that --
and his course also will appear on Open Yale shortly.
You can take the whole course.
But I don't know -- it's not up at this moment.
It will be up in a matter of months.
So, I encourage you, if you want to, to take
Open Yale Econ 251.
But the things that he talks about in that course, if you
read the topics in this course you'll see that they're more
mathematical and technical than mine.
He talks about ''Utilities, Endowments and How It Leads to
Equilibrium,'' ''Assets and Time,'' ''The Mathematical
Theory of Bond Pricing,'' ''Dynamic Present Value,''
''Social Security and the Overlapping Generations
Model,'' ''Uncertainty and Hedging.''
I'm quoting his titles.
''State Pricing.'' That's kind of an abstract theory.
We talk about the price of a state of nature.
I won't explain that.
He talks in some length about the ''Theory of Risk'' and the
''Capital Asset Pricing Model,'' and about the
''Leverage Cycle,'' which is relevant to our crises.
So, I recommend you take Econ 251, but I don't
expect you to take it.
This course is self-contained.
And I'm going to keep mathematics to the minimum in
these lectures.
But the idea here is that we can't avoid it completely.
I personally am mathematically inclined, too, but I'm
understanding that we have divided our subject matter.
So, John Geanakoplos is doing the math and the theory, and
I'm doing the real world.
It's not a complete division like that, but it's
something like that.
So, I'm going to stay to that.
I'm going to talk more about institutions and history than
about mathematics.
Since I know that most of you or many of you will not take
Economics 251, what we are doing is, I'll give a little
indication of the mathematical principles, more intuitive,
and we have review sessions with our teaching assistants.
We plan to have six of those.
And those will be on a Friday in this room.
And they won't be on Open Yale.
Those will cover the theory, and it will be like a short
form of Geanakoplos' course.
And then we'll have problem sets.
And there will be six problems sets, one for
each of those sessions.
So, there will be some math in this course.
I wanted to talk about the purpose of this course, to
clarify it.
One thing is, what do I imagine you're going to do
with this course?
Well, first of all, I pride myself that I think I teach --
if I might boast for a minute --
I think I teach one of the most useful
courses in Yale College.
At least that's the way I think about it.
Because this course really prepares you to do
things in the world.
By the way, I've been teaching this course now for 25 years.
I first taught it in the fall of 1985.
Now I don't know if that's depressing or not.
To me, it's great.
I like to be able to keep moving ahead.
I wonder what my 1985 course looked like?
Unfortunately, they didn't do Open Yale and I can't go back
and look at it.
But I think I've gotten more philosophical and maybe more
real world oriented as time has gone by.
But the excitement I have is when I go up --
I give a lot of public talks, and it's often on Wall Street.
And when I do one on Wall Street, I like to ask people
for a show of hands.
How many of you were in my Economics 252 class?
And I typically get one or two at least who raise their hand.
So, that's a source of pride to me, that I was involved in
the beginning of their careers.
And I hope I instilled some kind of moral sense
to what they do.
But I should say I don't think that most of you will go into
finance, because I think that most of
you have other purposes.
What does it mean to go into finance?
Well, it sounds like that means you would be listed as
someone who is very focused on finance.
But I think everyone should know finance.
This should be a required course, actually, at Yale
College, because finance is so fundamental to what we do and
the structure of our lives that I don't see how you can
avoid doing finance if you want to do
something big and important.
Maybe you don't want to do that either, so you might want
to become a hermit and then you don't need finance.
But to me I like to think that many of you have a sense of
purpose in life.
I should say --
that sounded funny, didn't it?
But what I'm saying is your purpose is not to make money.
And this is one thing about finance that bothers me, is
that people think that it's a field for money-grubbing
people who just want to go out and make money.
And I don't think so.
I think it's a technology for doing things, and you don't
want to be mystified by it.
When someone talks some financial jargon, you don't
want to say, I don't have a clue what that's about,
because what that's about is how we make things happen.
And so, I hope that you have other purposes in life besides
finance, even those of you who go into finance.
But the question is whether this is a vocational course.
Here at Yale College there has been a long tradition that we
are not a vocational school --
I suppose you know that --
that Yale is a liberal arts [college]
--
we teach you the arts and sciences.
I actually went to look at the charter and the act of the
Connecticut government in 1701 that founded this university.
This university was initially mostly a training ground for
the ministry.
But I actually read in the Acts of the Governor and
Company of the Colony of Connecticut: "Yale College is
founded for the educating and instructing of youth in good
literature, arts, and sciences." I think that is the
motive here for this university.
And so, I think it is in some level vocational, but it's not
vulgar vocational.
I want you to think about what we're doing and how it fits
into what you do for your life.
So, I think of finance as a kind of engineering in a way.
But it's an engineering that works not with what we call a
technical apparatus, but with people.
And so, if we want to understand how to do these
things, we have to get some technical
apparatus under our belt.
And that's what I'm going to try to do in this course.
The textbook that I chose for this course is by Frank
Fabozzi, who is a professor at the Yale School
of Management --
well, with two co-authors.
We have Franco Modigliani, for whom I have some personal
affection, because he was my dissertation adviser at MIT,
and who unfortunately died in 2003, and Frank Jones of
Guardian Life Insurance Company.
I've also written joint papers with, well, two
of the three authors.
I've written joint papers with Fabozzi and with Modigliani --
research papers.
But they're similar to me in many ways.
They're interested in the details.
I hope you get interested in the details.
I find this textbook fascinating for me.
Well, I first read this book when I first
started assigning it.
I was going on vacation with my friend Jeremy Siegel and
our families, who's a professor at the Wharton
School, and I brought this book as my poolside reading.
And I was sitting there with this book.
Other people were reading novels and fun things.
I don't know what they thought of me reading this textbook by
the pool, but I thought this is great, because I thought I
knew most of what's in here, but there's a lot of things
that I still didn't know and it was answering
all kinds of questions.
Things you always wanted to know about real estate
securities, OK, but you never found out.
Well it's all answered here.
So, I hope you can take that spirit
in reading the textbook.
That's the only book you have to purchase for this course.
And it's the main work that you have.
So, I'm going to ask you about the details on exams. The
kinds of municipal securities we have and how the rating
agencies rate them, that's part of this course.
I believe the details matter.
And so, I'm not going to just ask you broad
generalities on the exam.
I'm going to ask you the details.
It's a little bit like teaching a language, right?
Learning a language is really important, and you've got to
learn all the words, right?
There's thousands of them.
It's like that.
You're going to be learning the words of finance.
So, I have another book also, which is actually not done
yet, but you can access it through Classes*v2, and later
it will come out as a published book.
But I'm working on a book called --
well, I don't know what it will be called finally.
When you're writing a book, one thing you learn as an
author is, you can never be sure what the title of the
book will be.
Because if somebody else uses the same title and you're
done, somebody else gets to it first, you've got to change
your title.
But at this moment the title of my book is "Finance and the
Good Society." I'm not sure when it will be out.
I was hoping next year, but now I'm thinking it might take
longer than that.
So, you have something that's imperfect.
I hope you excuse me when you look at the
chapters of this book.
You don't have quite all the chapters either.
But I just thought it was a good thing to put it in
process for you to --
maybe if you have ideas you can tell me and the book will
change with your input.
To me it's a good way to write a book, is to be writing a
book and teaching a class at the same
time on the same topic.
It's more social.
You know, you just sit in your office and write and you end
up feeling sterile.
So, this makes it more alive to me to do
that at the same time.
But I'll tell you what my book is about.
The title that I now have, "Finance and the Good
Society," may sound to some people like an oxymoron,
because they're kind of incompatible.
People are angry about finance these days.
We've had --
and this is going to be an important part
of this course --
we've had the worst financial crisis since the Great
Depression of the 1930s.
And it's been a worldwide financial crisis and it isn't
over yet, or it's not clear that it's over yet.
And people are angry.
People are angry about finance, people who seem to be
getting rich often it seems at the expense of others.
Or they seem to be lobbying their governments to give them
breaks and bailouts, and they walk home
with billions of dollars.
Something seems immoral and wrong.
Well, I'm sure some immoral things are happening, but I
don't think that finance as a whole is wrong.
And I think of it as a noble profession.
So, I wanted to try to put it in perspective.
And it's especially important when talking to young people
like yourselves, because you're launching out on a
career, and I want that to be a moral and purposeful career.
And I want to put finance in the perspective.
So, the theme that I want to develop in my book
is that part --
you know, we live in a capitalist world now and this
world is increasingly built on finance.
Some people call it we're living in the era of financial
capitalism.
We have these big multinational institutions
that are owned by huge numbers, maybe millions, of
shareholders dispersed all over the world.
And what makes the whole thing work and click?
It's the financial arrangements.
The world is discovering the importance of finance.
When I go to a foreign country and give a talk, I
find that people --
it doesn't matter what country -- they're generally very
interested in finance, because they think that our modern
financial techniques are part of what's making so many
places in the world grow at rapid rates now.
We're living in a time in history when the developing
world is exploding with growth, and these countries
that are doing that are countries that are adopting
modern finance.
So, I want this to go right, and I want this to be
developing a good society.
By good society, I mean a just and fair society that allows
people to develop their talents and expertise.
So, another thought I had was that the field of finance--
let me give you another slide.
I said I view this course as one of the most important
courses in Yale College, at least from a standpoint of
your lives and careers.
I wanted to compare finance jobs with jobs.
And I don't mean to put down other departments, but at
least vocationally, let's put this in perspective.
I wanted to compare jobs in finance with
jobs in other fields.
So, this is a chart that I constructed using data from
the Bureau of Labor Statistics.
And what it has is the number of people in various
occupations in 2008 and their projections
for the same in 2018.
So, the red bar is for 2018, and we'll emphasize that,
because you'll be just getting into your
careers when that comes.
So, it says, if you look at financial analysts in the
United States there's almost 300,000.
Financial managers, it's over half a million.
Personal financial advisers, a quarter of a
million, all right?
These are people who specialize entirely in one
form of finance or another.
But compare that with economists.
Look at that.
What is that?
About 20,000?
I think they're excluding professors.
But, you know, just economists out there --
not very many.
How about astronomers?
OK.
I can't even read that.
I love astronomy by the way, but I think I made the right
choice when I decided --
well, I shouldn't say that, you never know.
We all have to do something different.
And you could become an astronomer, but there aren't
many jobs in astronomy.
Sociologists, political scientists, just not many
compared to -- this is just enormously bigger.
Or mathematicians.
I also put one oddball field on here:
massage therapists, OK?
The number of massage therapist jobs outnumbers any
of those other fields by, what is it, 100:1.
So, this is the kind of
disappointment that people face.
You go to the college or university --
this is very much on my mind -- you go to the university
and you develop special skills, and you leave and then
you end up driving a taxi.
That doesn't mean that I want to become vocational.
I mean, I don't want to just train you for a job, but I
want to be relevant.
And it seems to me that I can be relevant in
talking about finance.
And so, that's the basic core that I wanted to get.
I mentioned before that people think that finance is the
field for people who want to get rich, who want to make a
lot of money.
Well, I think that's right, actually.
[LAUGHTER]
I don't advise you to take that as your --
but I wanted to talk about that a little bit.
So, one thing that you'll note, Forbes Magazine has an
annual list of the 400 richest people in America.
So, I looked at that list. Who do you think they are?
Most of you probably have not read this list. You might
think that, well, who makes a lot of money?
Well, it's athletes.
Football players, right?
Baseball players.
And who else?
Oh, movie stars, right?
They make a lot of money.
So, how many do you think of those are on the Forbes 400 of
the richest people in America?
Well, as I read the list I didn't see a single movie star
or a single athlete.
There is -- it depends on how you define it.
Oprah Winfrey is on the list. OK?
You've heard of her.
She's in the entertainment business.
But you know, she's also a finance person.
She runs big businesses.
She's into making things happen.
And I can assure you that she knows finance, at least some
basic finance.
You see, finance gets you to build organizations.
That's how it's done.
And it means raising capital to make things
happen on a big scale.
You know, no athlete is as powerful as one of these
random guys on the Forbes 400 list.
It's interesting.
I looked down the list and I didn't spot a single Nobel
Prize winner.
Maybe I missed one.
I looked for best selling authors.
I found one: Bill Gates, who wrote a book
called The Road Ahead.
But there are not many best selling authors either.
What do they have in common?
Now about a third of them just inherited it from their
parents, but most of them did it themselves.
They just made huge sums of money.
And what do they do?
Well, they're typically in some boring line of business.
They make something, but they're doing
it on a vast scale.
And so, that means they're making deals, they're putting
things together, they're buying companies, they're
absorbing other companies into their's.
There's something powerful about an ability to do that.
And I think that it's good for you to understand and
appreciate that.
By the way, Forbes has another list called the Forbes
Celebrity 100.
And to be on that list, you have to be a celebrity.
It's a completely different list. Oprah is on both lists,
but she's practically the only one.
Steven Spielberg is on both lists, I think.
He makes movies, but he has a whole company called
DreamWorks, and he finances all kinds of movies, so he's a
businessperson as well.
So, I don't think of finance as a mathematical --
I mean it is mathematical, it has a core element of that.
But to me it's about making things happen and about
putting together deals and getting people incentivized to
do something, and getting capital, getting resources in
a massive scale so that something can happen.
And so, that's what this course is about.
Oh, Jerry Seinfeld is listed by Forbes as a possibility --
he's about the only one --
to make the list of the Forbes 400.
But he isn't there yet.
I don't mean to diminish these celebrity people, but there's
something else that goes on in finance, and it's quiet.
It's behind the -- actually, most of the Forbes 400 you've
never heard of.
They're kind of behind the scenes doing things that are
big and important, but they don't get on the news so much.
It's one of the ironies of life.
You might aspire to do this, to get on the Forbes 400.
You can do it and still nobody knows who you are or cares.
So that's just as well, I think, for many people.
So then, the question is: Suppose you get on the Forbes
400, what are you going to do with it?
In other words, to get on the Forbes 400 you have to have
made at least a billion dollars.
So that means, you have in your own portfolio a thousand
million dollars.
That's the minimum to make the list. So, what are you going
to do with a thousand million?
Any ideas what would you do with it?
You could buy cars, right?
How many sports cars could you buy for that?
What could you do?
You could buy 20 houses.
But that doesn't begin -- you could buy 20
houses and so what?
You know, you still have 900 million leftover.
So, what are you going to do with all that money?
And that's a question.
Now, some people who do that, who make all this money, try
to see if they can maximize their appearance of wealth.
They try to show to the world how rich they are.
So, you just build the biggest mansion and you do something
really spectacular.
But when you got a billion dollars, there isn't a house
in the country you could buy for a billion dollars.
You can only stay in one at a time, right?
So, what are you going to do?
But there are people who do that, and I think that there's
a history of disgust for those people, a long history.
We don't like people who do that.
It's almost like it's a big mistake.
Why would you do that when people don't like people who
show off their wealth?
There's evidence that people feel that way in many
different countries and cultures, because lots of
countries in history have what are called sumptuary laws.
It goes back at least to 700 BC in Ancient Greece with the
Locrian code.
These are laws prohibiting people from conspicuous
consumption.
And they've been in so many different countries that I
think it's evidence that something is amiss with making
wealth as the objective of your life.
So, one of the themes in the beginning of our
reading list is --
I think there's a movement afoot today around the world
of thinking about this problem, that you can get so
big and powerful if you build a business and you use the
financial techniques that are successful for other people,
but it's meaningless unless you give it away.
And so, what else can you do with all this wealth but plan
to give it away.
So, one thing I have on the reading list right at the
beginning is a chapter from a book -- well, the title of the
book is The Gospel of Wealth and Other Essays and it was
written by Andrew Carnegie.
Actually, he wrote a short article in a magazine called
"Wealth" in 1889.
And in the final paragraph he used the term "gospel of
wealth" and it was picked up all over the world as just
outrageous.
And so, it became named The Gospel of Wealth.
So, later in the early 20th century he came out with a
book entitled The Gospel of Wealth.
And that's what I have assigned.
You can click on it on the reading list. And Andrew
Carnegie was one of these --
they didn't have Forbes 400, but he was one of the richest
men in America through his Carnegie Steel Company, very
much steeped in finance.
But he decided when he wrote his essay, The Gospel of
Wealth, in 1889 that once a person reaches middle age,
like 50 or 55, and has made a lot of money, they really have
to go into philanthropy.
There's a moral imperative.
So, the theme of The Gospel of Wealth was some people are
just better at what he called affairs than other people.
That means business.
Some people have a sense of how to make things happen.
These people have a moral obligation to make this work
for the benefit of humankind.
And that means, while they're still young, they have to take
their fortune and give it all away before they die.
Because if they don't give it all away, it's nonsense.
If you make a billion dollars and you leave it to your
children, chances are they're not like you.
They're not going to be interested in working hard and
making things happen.
They're just going to squander it.
And so, that's what the moral obligation is.
You have to stop at age, let's say 55 --
OK, you still got time left --
and then use your same talents.
So, it was almost a theory of capitalism -- it is a theory
of capitalism.
It is a theory that some people are just more practical
and hardworking and business-oriented, and these
people can find things to do that benefit mankind, and they
should do it.
So, there's a natural selection.
This is Carnegie.
I'm not endorsing this entirely.
I think there's an element of truth to The Gospel of Wealth,
but it's not exactly true.
But the element of truth is right, that people like
Carnegie who was a very gifted person -- you
know what he did?
He set up the Carnegie Institute of Technology, now
called Carnegie Mellon University.
He set up the Carnegie Endowment for World Peace,
Carnegie Hall in New York.
He probably gave something to Yale, too.
Anyone know?
Is there a Carnegie?
He gave to like every imaginable university.
I know at Princeton they have a Lake Carnegie.
He was visiting Princeton and someone pointed out this kind
of swampy land and said we'd like to really create a lake.
So, he said, fine.
He gave them money to create Lake Carnegie.
And he also gave the money for the prize for the first true
competition on Lake Carnegie.
So, he just had all kinds of gifts he gave away.
I also have -- it's interesting, I
found this on the web.
Thomas Edison, the inventor, was so impressed with
Carnegie's The Gospel of Wealth that Edison was
developing the sound movie, I think it was 1914, but he
didn't perfect it.
But he said the first sound movie should involve geniuses
of our time.
So, he made a sound movie of Carnegie reading from his The
Gospel of Wealth.
Unfortunately, the visual side of it somehow got lost. Maybe
it didn't work.
We only have the soundtrack from the movie.
So, you can listen to Carnegie reading from this book in
1914, and it's the only recording of Carnegie's voice
that survived.
Since then, Bill Gates and Warren Buffett and others of
the Forbes 400 have done a campaign to get billionaires
around the world to commit to give most of their wealth
away, while they're still alive.
And I'm trying to get one of these people to speak to our
class, but I haven't yet arranged that.
I also have on the website a review from 1890 of Carnegie's
original essay from a California newspaper, and they
were so negative about it.
They said, Carnegie thinks that making wealth and giving
it away is a noble cause.
That cannot possibly be right.
These people who make money are not the most enlightened
and smart people in our world.
I think that the truth lies somewhere in between.
But we do have a society now where people --
we have an increasing concentration of wealth at the
top, and I don't know what we're going to do about this.
This is a trend that may continue.
And so, this is the thing I want to think
about in this course.
I don't think finance necessarily does this.
It may be a bubble, that there is currently a bubble in
financial careers and that you are going to be disappointed,
because 20 or 30 years from now if you go into a
finance-related field, you'll find that it's not as
lucrative as you hoped.
That kind of happens, right?
When a field becomes known for having a lot of successful
people, then more young people go into it and
they swamp the field.
On the other hand, I think that it will always be true
that just because of the power of the technology the top
wealthiest people in the world will be finance-related.
And I think that they will have a moral obligation to
give their wealth away in a productive way.
So, I have several outside speakers, and I tried to bring
in people that are connected to the world
in a positive way.
I'm trying to bring in inspirations for you as
outside speakers.
And they're people who are in finance
but who are not selfish.
They may be rich but they are good people.
So, the first person that I'm going to bring in, as I've
done in previous years, is David Swensen, who is Chief
Investment Officer for Yale University.
Swensen also teaches a course, Economics 450, with Dean
Takahashi, which you might want to take.
But I have him here just for one lecture.
And what Swensen has done is turn the Yale endowment into a
huge number.
He came to Yale in 1985, and at that time, Yale had less
than $1 billion in its endowment.
Swensen is the most successful university endowment manager
of the United States.
He turned less than $1 billion into $22.9 in 2008.
The financial crisis hit and the endowment fell, but as of
June of 2010, it was still 16.7 billion.
So, he has done so much to make Yale a success.
But it matters.
That's a lot of money.
And it's all for a good cause.
Now I say, I believe Swensen is a good person.
I think he turned down opportunities to make much
more on Wall Street, because he is known -- and he's
continually turning them down --
as an investment genius.
He can command huge salaries and bonuses if he wanted to,
but he stays here with Yale.
I don't think that people in finance are money-grubbers,
and this is an example of someone who's not.
The second speaker I have is Maurice "Hank" Greenberg, who
founded AIG.
It started out in 1962.
In 1962, he was put in charge of North American operations
of the American International Group, an insurance company,
which was then failing.
The head of the company, C.V. Starr, put him in this to try
to turn the company around.
He turned it, over many years as CEO of AIG, into the
biggest insurance company in the world, and he
ran it until 2005.
The company -- have you heard of this, AIG?
You must have heard of this.
In the recent financial crisis it has encountered some
problems. And, in fact, it was the biggest bailout of all.
It was bailed out by the U.S. government.
And there's a scandal about that because the
bailout was so huge.
It was in the hundreds of billions.
Record-setting bailout.
And some people are angry with Greenberg.
But I think that's completely unfair, because it all
happened after he left AIG.
And the problems were in a particular unit within AIG
that he was not really responsible for.
But Greenberg is a person who has, I think, a moral purpose
that I want to illustrate for you.
He's been criticized.
Anyone who does business on that scale is going to be
criticized for being too tough or too aggressive at times.
But he's a very involved person.
He's the Vice Chairman for the Council on Foreign Relations,
which is a think tank that thinks about the United States
and its place in the world.
It's a very important think tank.
He's also a major philanthropist and
he's given to Yale.
Notably, he gave the Greenberg Center, which is right next to
the Center for Globalization.
A beautiful new building.
So, he has agreed to come.
I'm very pleased to have him.
The third outside speaker that I have now is Laura Cha,
although she won't be here in person.
We're going to have her image up on the screen because she
is in Hong Kong.
And she is a non-official member of the Executive
Council of Hong Kong.
She's a member of the government of the People's
Republic of China at the vice ministerial rank.
She's the first non-Chinese delegate to the National
People's Congress representing Hong Kong, and has been vice
chair of the China Securities Regulatory Commission.
So, she is very involved in finance.
She's also been affiliated with Yale and helped some of
our initiatives.
She'll have to get up very late at night, I think, to be
on for 9:00 in the morning for us from Hong Kong.
I might get one or two other speakers, but that's where it
stands right now.
So, I wanted also to tell you about our teaching assistants.
We have four teaching assistants now.
We might get another, but at this point.
The first is Oliver Bunn who is from Germany, University of
Bonn, and is a PhD student in economics.
He's also our head TA who
coordinates the whole operation.
And then we have -- the second one is Elan Fuld from the
United States.
And he's doing an interesting study of the
pizza delivery industry.
It sounds funny, but it's an interesting application of
economic theory to very much the real world.
Bige Kahraman is from Bilkent University in Turkey, and
she's interested in Behavioral Finance.
That means --
I should have said this.
It's also an interest of this course.
I've skipped by it in my notes.
Behavioral Finance is the application of psychology,
sociology, and other social sciences to finance.
I don't know how I omitted mentioning that.
It's about people in finance -- well, I didn't really
completely omit mentioning it.
You've got the sense that I'm interested in people.
But there's been a revolution in finance
over the last 20 years.
Twenty years ago, finance was thought of in academia as an
essentially mathematical discipline,
that and nothing more.
Well, maybe I'm exaggerating a little bit.
But what's happened since then is people think of finance as
involving psychology.
We have to bring people with knowledge of human beings in.
And so, her dissertation topic, a major theme of it, is
how mutual funds operate.
Mutual funds are companies that offer investment vehicles
to the general public, and she finds that the mutual fund
companies have complicated fee schedules and they offer
different choices to people.
And what sense does this make?
Why are there all these different choices?
You look at the fee schedules and you think --
it's just like your cell phone plan, right?
It's got different choices and you don't know which one I
should take.
Why are they doing all this?
Well, she tries to analyze what's going on and she finds
that sometimes it seems like clients are steered toward a
fee schedule that's really not in their interest and that the
mutual fund managers are doing some things that maybe we
don't want them to do.
Maybe it's not ideal.
They're pushed by competitive pressures into offering
products that are a little bit manipulative of people.
And her dissertation also brings up another theme, which
I thought I perhaps should have emphasized, that all is
not well in the financial world.
Lots of bad things happen.
Or not necessarily awful things, but, you know, not
socially conscious things.
And that's why we need regulators.
That's another reason why I brought in
Laura Cha, by the way.
She's a regulator.
I wanted to have a voice from that side, because I
personally admire regulators and think that they have a
very important function in our society.
So, her work fits more into that
regulatory side of finance.
And then, finally, our fourth teaching assistant is Bin Li
from Beijing, although he went to college at University
College London.
And he has broad interests including Leveraged Asset
Pricing and also Behavioral Finance.
So, those are the teaching assistants.
So, let me just give a brief outline of the course.
There are 20 lectures that I'm giving in this course.
This is the first. Let me just go through what's the content
of these lectures.
So, Lecture 2, that would be on Wednesday of this week, I
want to talk about the core concept of risk and also about
financial crises.
The one reason why I wanted to update this course with Open
Yale this year is, because I wanted to talk about the
financial crisis that we've been through, though I thought
this lecture would start with something about the theory of
probability, but I'm not going to get into that very much.
That will be more for a TA section that
will come in later.
But even so, this is not a probability course.
I just want to kind of remind you of the concepts of
probability.
And there's a concept of independent risks.
If risks are independent you can diversify away them, and
you can put together a portfolio that
minimizes the risks.
The law of large numbers says if you have a lot of
independent risks, they'll average out if you have a
large number of these different risks in your
portfolio and there's no risk left.
That's if they're independent.
But in fact, risks are not as independent as you think, and
that's one reason why we had a financial crisis.
And so, a lot of people were making plans based on
portfolio theory in finance, but the plans assumed that
there won't be a crisis, that maybe one of our investments
will go bad, but they can't all go bad or a large number
of them can't go bad.
So, that was a failure of the independence
assumption in finance.
That failure created the financial crisis that we've
been through.
It was a near miss onto another Great Depression.
The financial crisis that began in 1929 --
I'll talk about that briefly in that lecture --
started with the stock market crash of 1929 and the economy
spiraled down until 1933.
It just kept getting worse and worse.
More and more bankruptcies, more and more layoffs.
So, by 1933, 25% of the U.S. population was unemployed.
And it wasn't just the U.S., it was all over the world.
It was a horrible crisis.
And we didn't get over that crisis until World War II.
It's like we couldn't get out of it.
The crisis got so bad that nobody in the world could
figure out what to do.
And I think that part of the reason we had World War II was
because of the anxieties and animosities caused by this
massive unemployment.
But we got out of it because World War II created a huge
stimulus program.
I mean, they drafted all the unemployed
and made them fight.
What an awful outcome, but that's what happened.
It's terrible.
And so, this time we saw the beginnings
of a similar crisis.
We saw crashes in the stock market and the real estate
market, we saw bankruptcies appearing,
we saw runs on banks.
And this time the Government decided on a controversial
bailout package.
And so, Ben Bernanke and Mervyn King and other central
bankers and government policymakers around the world
had the idea that we can't let it happen the
same way this time.
So, there was massive bailouts, controversial
bailouts, because they seemed to be unfair to many people.
So, it's a huge and interesting story.
I've written three books, by the way, about this crisis.
Well, two of them with co-authors.
So, it's something that fascinates me.
But I don't want to dwell on it too much in this course,
because I'm hopeful that it will heal itself and we can
put it behind us.
And the financial crisis doesn't call into question the
basic principles of finance.
Not in my mind.
The vulnerability to a crash that we see in financial
markets is like the same thing as the vulnerability to crash
of airplanes.
Airplanes crash from time to time.
You must know that when you get on one.
But that doesn't mean we shouldn't have airplanes.
And I think the financial system is advancing in the
world with such speed and such impressiveness that this
crisis is just a blip on the screen of that, and not
something I think we should worry too much about.
The third lecture is about technology and
invention in finance.
Finance is a technology just like engineering or mechanical
engineering.
It has principles, it has techniques, and it involves
inventing of details.
That is, financial institutions are complicated.
They're complicated in the same way automobiles or
airplanes or nuclear power reactors are.
You can see this complexity, if you read some of the
documents that are associated with the modern corporation.
There's a lot there.
And the way the cash flows are divided up among different
people, involving options and derivatives and other
complicated financial instruments, are part of the
technology.
And this technology is advancing, and it will advance
a lot over the time of your career.
I don't have an ability to predict the future with any
accuracy, but I want to try to think about what we can say
about the future.
I wrote a book in 2003 called The New Financial Order, and
it was my take on the future.
But the problem is nobody really knows
the future very well.
You kind of have to just invent it or dream about what
it might be like.
That's what I did.
I kind of thought about principles of financial theory
and where they might go with the advance of information
technology and the globalization of the world.
So, I have just a chapter from that for that
section of the course.
Then, Lecture 4 is about portfolio diversification, how
risks are spread.
And we'll talk briefly about the Capital
Asset Pricing Model.
Now again, the Capital Asset Pricing Model is a
mathematical theory of diversification.
A very important theory, and it's something that John
Geanakoplos will cover with more rigor in Econ 251 that I
already mentioned.
But for me, I will talk briefly about the capital
asset pricing model, and one of our teaching assistants
will give a section on it.
But I want to also think about, since this is a course
about the real world, I want to think about financial
institutions, and so many of our institutions are offering
diversification one way or another.
And so, again, I wanted to talk about the real world
component of this.
The fifth lecture is about insurance.
And the insurance industry developed over the centuries.
It goes, actually, all the way back to Ancient
Rome, but only minimally.
People didn't have the concepts until the 1600s when
probability theory was invented.
There was an intuitive concept that, sure, I could start an
insurance company, I could put together a lot of insurance
policies and charge for them, and probably I won't --
you just have intuitive sense about law of large number or
independence of risks.
Probably, I'll be OK and I can make good on the
policies that I wrote.
But it was never clear until
probability theory was developed.
Since then, it's been growing and it's becoming a bigger and
bigger part of our lives.
And I think that insurance is actually a lifesaver.
I'll give you one example.
You note that in the earthquake in Haiti --
what was that, about a year ago?
There was a tremendous loss of life, but the earthquake in
San Francisco decades earlier was of the same magnitude and
had very little loss of life.
Also, the loss suffered by people in terms of destruction
of their homes and their office buildings was vastly
higher in Haiti.
Well, it turns out that Haiti, a less developed country,
didn't have much of the modern insurance industry, so that
people were uninsured against risk of collapse of their
structure and you didn't have insurance industries going in
and policing building codes.
If the insurance company is liable to the risk then they
go in and say, we won't insure you unless you fix this.
Since it didn't happen, so many people died.
I think that Haiti will come along.
There is already a Caribbean insurance
initiative that was starting.
We want to see the developing world get these institutions.
I want to try to give a sense of the reality of that, that
we tend to think of Haiti as an opportunity for our
charity, and a lot of us gave money to help these people.
But, you know, charity doesn't work on a big enough scale.
Going around to people on the street and asking them to give
money to help the Haitian earthquake victims, it doesn't
amount to a lot.
What really becomes big and important is the insurance
industry, which is doing the same thing
as a business model.
And that's the real world and it matters enormously.
The sixth lecture is about efficient markets.
This is about a theory that developed in the 1960s, that
financial markets are wonderfully perfect.
I'm saying I'm a little bit skeptical of this theory,
although I think it has an element of truth.
Efficient Markets Theory is the idea that you really can't
make money by trading in financial markets, because the
markets are so competitive that price is always pushed to
an optimal level that incorporates all information
that anyone could ever have about the security.
And the theory has been that it's hopeless to try to invest
and beat the market.
Well, I think there's an element of truth to that but
it's not quite true, and people like David Swensen are
counterexamples, that it is possible for professional
money managers to beat the market.
And that's something I want to think about and talk about in
that lecture.
Lecture 7 is about debt markets.
We have a lot of money that's lent.
The Federal Reserve manages these markets.
They try to coordinate the markets through open market
operations and through what now is called
Quantitative Easing.
But the markets are huge and international.
They involve errors that people make.
A lot of people get overly indebted and make mistakes
over their lives.
But they also offer opportunities, that debt
markets are fundamental to the things we want
to do in our lives.
For example, when you are a little bit older, many of you
will want to buy a house, right?
But you won't be in that point in the life cycle when you
have the money to buy a house, most of you,
so you'll be borrowing.
It's elementary.
You take out a mortgage.
That seems obvious.
But still today in many countries of the world, the
mortgage market is not very developed, and
you can't do that.
So, there's a good side to borrowing as
well as a bad side.
I want to put it in perspective.
We've got our review session.
We'll talk a little bit, somewhat, with one of our
teaching assistants about the mathematics of debt.
Lecture 8 will be about the stock market.
Again, I think of the stock market not as something that
we're going to beat.
I think it's something that is an invention to motivate
people to get people working together.
So, the basic idea of a stock investment: You and your
friends want to set up a company, OK?
How do you do that?
Well, the company needs money to start.
So, somebody's got to contribute capital.
Well, some of you have more money to contribute than
others, so you should have a bigger share in the company.
Some of you have no money at all to contribute, but you're
going to contribute your time and energy.
So, you want to give a share in the company to these other
people as well in order to incentivize them.
So, you devise a whole scheme to set up a company that
involves the creation of stock.
And then you start trading the stock and then it gets all the
more interesting.
And then there are options on these stock certificates.
But it's all for a purpose.
The purpose is to make some enterprise happen.
And it really is important that we have these
institutions, and if you don't have them, your little group
trying to do something is going to fall apart.
Someone's going to get angry and leave. It's just
not going to work.
And so, I think of the stock market
as doing these functions.
Now I know Karl Marx said he thought it was a big casino,
but we're not communists here.
This is about modern finance.
Lecture 9 is about real estate.
Another fascination for me.
I've been working for years about real estate.
And, in fact, with my colleague Karl Case, we have
our own home price indices called the Standard and Poor
Case-Shiller Home Price Indices.
We'll talk about those.
But it's really important for this crisis that we've just
seen, because the financial crisis was caused
substantially by a bubble in home prices, I believe, a
psychologically induced excitement or euphoria about
home prices in the United States and in other countries
that collapsed around 2006.
These bubbles are restarting in other parts of the world
more recently.
And the real estate market is getting very speculative and
psychological, I believe.
And the outlook right now for the economy hinges on how
these markets behave. So, that will be, I think, an important
lecture for this course.
Lecture 10 is about Behavioral Finance.
It's about psychology in finance.
I talked about that.
It's another long-standing interest of mine to try to
incorporate psychology into our theory.
So, lecture 12 is about banking, multiple expansion of
credit, the money multiplier, and bank regulation, which is
something that is a fascinating topic, because we
almost lost our banking system.
We had to bail them out massively.
We have international accords now.
Notably, a new one just came out called Basel III from
Basel, which is the city in Switzerland, and it was
endorsed by the G-20 countries at their
Korean meeting in Seoul.
So, we're seeing a change in bank regulation that will, we
hope, prevent another crisis like the one
we just went through.
Lecture 13 is about forwards and futures markets.
Forward markets are markets for contracts that deliver in
the future.
Over-the-counter contracts, they're called, that are done
one on one between parties with the help of
an investment bank.
Or futures contracts, which are traded on organized
futures exchanges, like the Chicago Mercantile Exchange.
I have some involvement with this, because we worked with
the Chicago Mercantile Exchange to create a futures
market for single-family homes using the S&P
Case-Shiller Index.
So, I'm involved in this.
And we have that market functioning at a rather low
level, but it is functioning and it seems
to be growing lately.
I'm hopeful for that market.
Lecture 14 is about options markets.
These are most typically stock options, which are contracts
that allow you to purchase a share of a stock or to sell a
share at a pre-specified price.
These are traded on options exchanges.
They have a price that goes up and down.
This is an example of a derivative contract that
injects a lot of complexity into financial theory.
Lecture 15 is about monetary policy.
It's about the central banks of the world.
For example, our central bank, called the Federal Reserve in
the United States.
And it's about what they do and how they help prevent
crises like the one we've just seen.
They did help prevent it.
I think they staved off disaster.
Lecture 16 is about investment banking.
I know this is of great interest, because we place a
lot of students in good jobs in investment banking.
Companies like Goldman Sachs, the most talked about one.
Investment bankers help companies raise capital, issue
securities, retire securities.
And we're going to talk about how they're regulated.
And I didn't mention Dodd-Frank, by the way, but we
have a new bill that just passed in July in the United
States that changes the regulatory structure for
investment banks and a whole array of financial
institutions.
And I want to talk about that.
The European Parliament has created a number of new laws
and organizations that somewhat resemble Dodd-Frank.
And other countries have also done financial regulation
reform that affects investment banking and
other aspects of finance.
It's extremely complicated.
I don't want to give you too many details but I want to
give you some sense of the revolution that we're seeing.
Lecture 17 is about professional money managers
like David Swensen, people who manage portfolios.
You don't have to be a billionaire to manage a
billion-dollar portfolio.
In fact, some of you may be doing it sooner than you
realize if you get the right kind of job.
Managing a portfolio means managing the risks, putting
them in the right places.
You think of institutional investors, big money managers,
as just trying to make money.
But when you get into that field you realize that you
have power as an institutional investor.
When you own a big share of some company, you can go to
the board meeting and talk to these people, or the
stockholders' meeting, and you will get heard if you own 10%
of the shares of a company.
Then you suddenly realize that you are a steward of the
public interest. And I think institutional investors are
recognizing that more and more.
Lecture 18 is about exchanges, brokers, dealers,
clearinghouses, like the New York Stock Exchange or the
London Stock Exchange.
They are proliferating around the world.
Whereas there were just a few 30 years ago, now almost every
country has a stock exchange and a
complicated list of exchanges.
They're increasingly electronic, they have
interesting new features, like microsecond trading that's
going on, computers trading with other computers.
We'll talk about where this is going.
Lecture 19 is about public and nonprofit finance.
So, I think this is very important.
Nonprofit finance would include organizations like
Yale University, or churches and charities and
other things like that.
But I'm also including in this lecture public finance.
And that means governments financing projects.
So, for example, you take it for granted that our city here
of New Haven has roads, it has schools, it has
sewers, it has water.
All this kind of comes without you even asking.
But all of these things had to be financed.
And the City of New Haven, like other cities, is issuing
debt and it's a complicated business.
I want to get you into some of the details, because it
matters, because this is how you make things happen.
You can go to your city government and you can propose
that they issue revenue bonds to start some new product.
You would know --
that's what I want you to do, is to know how these things
are done, so that it's not just imagination,
you can make it happen.
And also nonprofits.
I want you to understand that you can set up your own
nonprofits, and there's a lot of advantages to doing that.
That's an organization that has a financial structure but
no shareholders.
Nobody takes home the money.
It all goes to some cause.
And, finally, my last lecture, Lecture 20, I'm calling it
''Finding your Purpose in Finance.'' I just want to come
back in the last lecture to the idea that this is a course
not about making money.
I don't want you to give a billion dollars to your
children and grandchildren, which they will then squander
in conspicuous consumption.
The idea is a moral purpose.
And that's one thing I wanted to try to convey, partly with
outside speakers, maybe with other examples that I can
give, that I think that many people who are wealthy and who
have succeeded in finance really don't care about
spending the money on themselves.
They really do have a purpose.
And even if that's not true of many of them.
There's an interesting book by Robert Frank, I don't have it
on the reading list, called Richistan, who talks about
what wealthy people are like these days.
And if you read his book sometimes they are
disgustingly rich and spending the money on silly things.
But there is an idea among many of them that they are
going to do their good things for the world.
Because I think many of you will do these things, I want
to think about the purpose that you'll find in finance.
So, that's just the closing thought.
I'll see you again on Wednesday.
But the closing thought is that this is about making your
purposes happen.
OK.