Fighting the Next Global Financial Crisis

Investors hunt for news from many sources and assess the reliability. Investor attention can focus on surprising trends, and regulators must adapt to shifting narratives and moods, explains Robert Shiller, Yale economics professor and the 2013 Nobel laureate in economics. Shiller details the history of money-market funds and the threat of mass withdrawals during the 2008 global financial crisis. The funds in question, ready to pay investors 97 cents on the dollar, were not in crisis mode, but some investors were wary in 2008 and unaccustomed to losses once common with inflation. The US Securities and Exchange Commission, as regulators, swiftly guaranteed the funds for one year and acted later to reduce the money-market funds’ vulnerability. Anticipating the emerging narratives is a challenge for both investors and regulators. “As long as we have an economic system that produces growth by rewarding inspired actors and investors, we will face the risk that adverse talk and stories can suddenly and temporarily overwhelm the inspiration,” Shiller concludes, adding that “the most urgent regulations will always be time- and context-specific, because narratives change.” – YaleGlobal