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Most experts will tell you that Barack Obama needs to move quickly to contain the multitrillion-dollar market that turned low-quality mortgages into high-priced derivatives, the Wall Street innovation now widely blamed for the credit crisis. Shiller says the opposite. He argues that unless the central issue of risk is addressed, all the money that governments are pouring into financial rescues won't prevent another, potentially worse financial crisis down the line. In Shiller's view, derivatives "are a risk management tool much the same way insurance is. You pay a premium and if an event happens, you get a payment." His radical answer to our problems is that trying to leash financial innovation is hopeless, and that we should instead push forward into a brave new world where derivatives become as common as cash.
What separates Shiller from the majority of economists is his lack of faith in the "efficient-market hypothesis." That belief, which also guides the hand of most money managers, holds that the market will price assets according to their fundamental value and that those prices reflect all pertinent information. Shiller instead follows those, like John Kenneth Galbraith, who hold that market prices reflect "animal spirits" and popular passions, not perfect information.
