This is a guest lecture by Laura Cha, former vice chair of the China Securities Regulatory Commission and a member of the Executive Council of Hong Kong. In her introductory remarks, Ms. Cha emphasizes career opportunities in the private as well as the public sector of financial markets, and elaborates on her own career as a regulator in the Chinese market.
To begin the lecture, Professor Shiller elaborates on the difference between forwards and futures and on the role of futures markets to infer future prices for the underlying commodity or financial asset. Generalizing the discussion beyond futures markets to derivatives markets, he assesses the issue of speculation in those markets and its impact on capitalist activity. Subsequently, he introduces the notions of counterparty risk, standardization of contracts, and clearinghouses within the framework of the first futures market, the market for rice futures in Dojima, Japan.
This is a guest lecture by Maurice “Hank” Greenberg, former Chief Executive Officer at American International Group. Mr. Greenberg starts his lecture with reflections on his time in the U.S. Army during World War II and the Korean War as well as on his first job in the insurance business as a junior underwriter. Subsequently, after meeting Cornelius Vander Starr, he restructures Starr’s failing company The American Home and creates the American International Group (AIG).
Banks are among our most enduring of financial institutions. Their survival in so many different historical periods is testimony to their importance. Professor Shiller traces the origins of interest rates from Sumeria in 2000 BC, to ancient Greece and Rome, up to the Song Dynasty in China between the 10th and the 12th century. Subsequently, he looks at banking in Italy during the Renaissance and at the goldsmith bankers in 16th and 17th century England. Banks have survived so long because they solve adverse selection and moral hazard problems.
After talking about human failures and foibles in the last lecture, in this lecture Professor Shiller discusses regulation to minimize the impact of human errors. He outlines five different levels of regulation: regulation on the firm level, on the level of trade groups, on the regional, the national, and the international level. Concerning the first level, he emphasizes the role of the board of directors as the regulators of a company, its duties of care and loyalty, and its responsibilities in the face of tunneling.
Deviating from an absolute belief in the principle of rationality, Professor Shiller elaborates on human failings and foibles. Acknowledging impulses to exploit these weaknesses, he emphasizes the role of factors that keep these impulses in check, specifically the desire for praise-worthiness from Adam Smith’s The Theory of Moral Sentiments. After a discourse on Personality Psychology, Professor Shiller starts a list of important topics in Behavioral Finance with Daniel Kahneman’s and Amos Tversky’s Prospect Theory.
Real estate finance has been crucially important throughout its very long and complex history. Describing the history of mortgage financing, Professor Shiller highlights the historical development of well-institutionalized property rights for mortgage contracts. Subsequently, he focuses on modern financial institutions for commercial real estate, elaborating on Direct Participation Programs and Real Estate Investment Trusts as means for its financing.
Professor Shiller emphasizes the worldwide importance of corporations by looking at World Bank data for corporate stocks as traded on global stock markets. He then turns his attention to the concept of a corporation, elaborating on the role of shareholders, the board of directors, and the Chief Operating Officer. Following this, he compares and contrasts for-profit and nonprofit corporations. Next, he discusses equity financing of for-profit corporations, covering market capitalization, dividends, share repurchases, dilution, and the difference between common and preferred shares.
Professor Shiller devotes the beginning of the lecture to exploring the theoretical determinants of the level of interest rates. Eugen von Boehm-Bawerk names technical progress, roundaboutness, and time preference as the crucial factors. Professor Shiller complements von Boehm-Bawerk’s analysis with two of Irving Fisher’s modeling approaches, the view of the interest rate as the equilibrium variable in the savings market and the perspective of simple Robinson Crusoe economies on the determination of interest rates.
This lecture is a guest lecture by Professor David Swensen, Yale University’s Chief Investment Officer. The starting point for Professor Swensen is an article entitled Crash Course, published in Barron’s in the wake of the financial crisis from 2007-2008. This article blames his endowment investment approach for a failure of diversification and an overemphasis on alternatives.
