Finance and the Good Society

Recent financial reforms—most notably the Dodd-Frank Act and the Basel III rules—are often described as “reining in Wall Street,” preventing taxpayer bailouts and protecting consumers from financial meltdowns. Simply reining in Wall Street, however, is not sufficient. With the benefit of recent lessons and improved knowledge of human behavior, we should work to release the potential of financial innovation. Despite the bad press financial innovation has received as a result of some individuals and institutions taking advantage of faulty innovations to enrich themselves, financial innovation has the potential to prevent worsening inequality and other social problems. History shows that advances in civil society have been associated with progress in financial institutions and practices. Robert J. Shiller is the Arthur M. Okun Professor of Economics at Yale University.