Marketing opportunities from the global financial crisis

Dick Bryan, The University of Sydney

Robert J. Shiller, The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do About It, Princeton, Princeton University Press, 2008 (pp. 208). ISBN 9-78069113-929-6 (hard cover) RRP $35.95.

George Soros, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means, Melbourne, Scribe Publications, 2008 (pp. 192). ISBN 9-78192137-248-3 (paperback) RRP $27.95.

So much has been written about ‘the global financial crisis’ in the recent past. It has even got its own acronym—the GFC—presumably to make writing faster. I fear that the growth of this ‘product’ is mirroring the crisis itself, or at least one interpretation of it. Anyone with a view about anything is in print, many with but a tenuous connection to reality, and all generating collectively a massive growth of speculative positions on the crisis. Most readers will have trouble telling quality from the junk—bring on the publishing crash.

I’ve been writing about finance for a while now, observing the johnny-come-latelies, who knew nothing of finance a year ago, now adding dramatically to the volume of ‘analysis’, but probably not so much to the weight. And if I’m feeling that way, then the likes of George Soros and Robert Shiller must be holding highly leveraged exposures of this feeling. They’ve been calling financial trends for a long time. Soros has been participating in (some say causing) financial crashes for two decades. Shiller (2000) coined the term ‘irrational exuberance’, which is now standard in the financial bubble lexicon, and he can fairly claim to have made broad, early predictions of the tech wreck and the unsustainable housing bubble (see also Shiller, n.d.).

They both hit the publishing market in mid-2008 with books on the GFC. Given how much has unfolded since these books were published, we might see the rush to the presses as exercises in staking claims to authority, rather than as explanations of the crisis in its full complexity. But, to their credit, the fact that Soros and Shiller had credible copy ready to print soon after crisis got rolling is itself a statement of something.

So my problem is: how to create a point of entry to these sources, without simply adding to the pile of crisis articles? Here is the best I can do. Their common theme is the calculation of risk. Soros argues that risk cannot be adequately calculated because the nature of markets themselves means that the process of calculating risks (and trading according to those calculations) actually changes the risks themselves. Shiller argues that we have left too many risks uncalculated, and that the solution (a term that he audaciously uses in the title of his book) is to compute and trade more risks. Soros and Shiller are, in this dimension, completely at odds, although in other dimensions less so. But the fact that the two people who got closest to calling a crash have opposite views on something as fundamental as their conception of risk tells us starkly just how complex the crisis is. Not only is it extremely difficult to find regulatory solutions, but it is also, apparently, even harder to understand the basic processes that drive markets and market behaviour.

Shiller predicted the tech wreck and the unsustainable housing bubble.

But let me back up a little, with a preamble on risk. It seems that risk and the calculation of risk is a new thing, and indeed it is in popular discussions of finance. We used to think that risk was something for entrepreneurs to engage in. The theoretical rationale for profits was that entrepreneurs engage in risk-taking ventures, and need the expectation of profits to motivate them to invest. But, and this is critical, undertaking risk was a voluntary act; an act of commercial bravery.

We now see risk isn’t just a choice made by entrepreneurs: it is unavoidable and everywhere, and we all face it. The reason we didn’t see it in the past (or didn’t use the concept to frame how we understood the world) was that throughout the post-war period, the state covered so many risks—it ‘self-insured’. Instead of floating and volatile exchange rates, we had fixed and stable exchange rates. The same was true of interest rates, and especially mortgage rates. All were fixed by governments and subject to only infrequent change. The same was true of agricultural prices and the prices of utilities—gas, electricity, telephone: all were prescribed by the state and stable. Health and education were the same: funded by the state.

But as the state withdrew from managing these aggregates—call it the rise of neo-liberalism if you will—many risks were dramatically revealed, and new sorts of risk opportunities created. Exchange rate risk and interest rate risk, especially for the big end of town, became conspicuous. And then for the punters, as borrowing became the norm, interest rate risk became conspicuous, and we all came to be exposed to a plethora of choice about telephones, electricity and gas ‘packages’, school choice and health insurance. With privatisation and the celebration of choice came exposure to the risk of wrong choices, even if they were wrong only retrospectively. In a sense, we acquired the profile we had once attributed to ‘entrepreneurs’—we have to calculate risks and purchase products according to our risk profile. Do I make more long distance than local calls? What is my rate of calls to mobiles, at what time of day? Am I better off with this cap or that cap? It is all about risk calculation. Randy Martin (2002) has called it the ‘financialization of daily life’. Risk, therefore, is no longer something one voluntarily engages: you cannot but be a player. We are now compelled to be the entrepreneurs of our own lives.

But we don’t always manage that role well. The car accident, unexpected of course, shows that we were in the wrong health insurance plan. There was the long call to a mobile that crashed through the cap, with enormous penalties or, most stark of all, the mortgage that was only manageable until the new baby, or the layoff from work, or that car accident.

With the celebration of choice came exposure to the risk of wrong choices.

So these sorts of calculations are everywhere, and have real social meaning, although they do not have the number of zeros that accompany risk positioning in global finance. Moreover, in both instances, there is a culture that risks are individual, and we can and should calculate our own risks. Miscalculation, then, becomes a personal failing.

The vision that created this risk-driven world was ideological nonsense, conceived in nothing more sophisticated than Margaret Thatcher’s idea that ‘there is no such thing as society’. The global financial crisis has demonstrated the stupidity of that conception. It has left former Federal Reserve Chairman and devout libertarian Alan Greenspan looking out of his depth. As he told the US House of Representatives Oversight Committee on 23 October 2008, in classically central banker circumlocution: ‘I found a flaw … in the model that I perceived is the critical functioning structure that defined how the world works, so to speak’. (To clarify, when asked by the Committee Chair whether this meant that ‘Your ideology was not working?’, Greenspan replied: ‘Precisely!’ (Public Broadcasting Service 2008). Of course, ideologies are not ‘right’ or ‘wrong’, but we got the point.

The individualistic discourse that projects a capacity for individuals to calculate their own risks independently of others’ risks—whether we are talking banks or households—is based on an extreme and unsustainable social vision. All these risks are interconnected, and many are systemic. Unless we get this, we can’t understand how risk and fear spread in the GFC.

What do/did Soros and Shiller offer on this issue? They both address the idea that risk is systemic—it is a combination of personal and systemic processes, and there is need to appreciate the interaction between these levels. The maverick Soros puts most of his analytical focus on the system, although spends some time telling us of his own individual adroitness in picking the turning point and successfully riding the market as it fell. His overall theory is about a process he has long-called ‘reflexivity’: sociologists now call the same sort of thing ‘performativity’ (although in relation to finance, I think Soros got there first). The two terms combined are suggestive: market processes are not simply mechanical and technical, they are performed by human agents, and the act of participating in a market (for example, as a bond trader) itself changes the market. As Soros says: how can bond traders price the future when they make the future? There is a circularity involved, which is directly compatible with bubbles (to use Shiller’s language) and the bursting of bubbles.

The vision that created this risk-
driven world was ideological nonsense.

Shiller’s ‘irrational exuberance’ is his systemic interpretation of bubbles: they occur when there is over-confidence that the market will keep rising on no more profound a basis that people believe it will keep rising. He is now describing a negative bubble—over-confidence that the market will keep falling (or is it under-confidence that it will stop falling?). So collective psychology is his explanation of systemic trends, but, like a modern neo-classical economist, he frames his solutions in terms of changing individual behaviour.

Shiller says the problem is that we don’t have enough markets for enough risks so that individuals are left holding risks that they can’t insure against. He wants a massive expansion of financial markets. What if the skill you train for becomes technologically superseded, or if your industry gets sent off-shore? There should be an insurance market for those outcomes that are beyond your control. What if your life amenity is diminished when you see growing global inequality? There should be a product you can buy which gives a payout when the global Gini co-efficient crosses a certain level, and you can give the payout to poverty alleviation.

Specifically in the context of housing, such a conspicuous catalyst of the GFC, people should be able to trade in house price derivative markets. Here is how it would work. Your house is your greatest investment asset. You are scared its price will fall. So you should be able to trade a house price index. What you would do is place bets that the average house prices in your area will fall. If house prices do fall, you win the bet and so have a dividend to offset the loss of house value. If you lose the bet, it is only because your fear was unfounded. You’ve lost your betting money, but in a leveraged derivative market, that is the minor cost of buying security in the value of your asset. For a relatively small fee, your exposure to house price movement is neutralised. Shiller is so committed to this solution that he is the partner of the company that runs this product on the Chicago Mercantile Exchange: the housing price bets are called Case-Shiller Housing Contracts. This is the centrepiece of his ‘subprime solution’.

So Shiller’s analysis is a challenging combination. Overall, the problem is systemic, in the form of bubbles, but the solution is individual. However, since he published The Subprime Solution, Shiller has appeared regularly in the media, including in Australia, as a strong advocate of government bailout packages. He thinks more federal government expenditure will be necessary.

The maverick Soros puts most of his analytical focus on the system.

Is there a tension here between his stand on bailouts and his view of the solution lying in extending markets for risk? It would be interesting to hear his thoughts, but Shiller’s Subprime Solution was already on the bookshop shelves before the bailouts got going. The problem of going to print with the ‘solution’ so long before we had seen the full nature of the problem is that the solution offered cannot engage debates about bailouts. If you know the formula for the crisis before the crisis has played out, your analysis of the crisis is destined to be mechanical and rather limited. Same for Soros. He has sought to tell us the ‘new paradigm’ before it is fully clear what the problem is!

Indeed, as someone who regularly reads the work of Shiller and of Soros, I can’t help but observe that, apart form the odd insight, I’ve read it all before in their earlier books. So why not wait, and present to the world a more lasting analysis? The reason I proffered at the start was that they were staking a claim to intellectual turf. In the process, they’ve sold plenty of books in a contracting global economy. They do indeed know how to read market trends!


Martin, R. 2002, Financialization of Daily Life, Temple University Press, Philadelphia.

Public Broadcasting Service 2008, Transcript of interview, Online Newshour, Greenspan admits ‘flaw’ to Congress, predicts more economic problems, 23 October [Online], Available: [2009, Mar 10]. (Video of Mr Greenspan’s evidence to the Committee is also available at [2009, Mar 10].)

Shiller, R. 2000, Irrational Exuberance, Princeton University Press, Princeton.

Shiller, R. n.d. Irrational Exuberance, Second Edition [Online], Available: [2009, Mar 10].

Dick Bryan is Professor of International Political Economy at The University of Sydney. He researches and teaches on global financial markets, theories of money and financial derivatives.

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