Smart Money: How High-Stakes Financial Innovation is Reshaping Our World-For the Better

by Andrew Palmer

Overview

Seven years after the financial crisis of 2008, financiers remain villains in the public mind. Most Americans believe that their irresponsible actions and complex financial products wrecked the economy and destroyed people's savings, and that bankers never adequately paid for their crimes.

But as Economist journalist Andrew Palmer argues in Smart Money, this much maligned industry is not only capable of doing great good for society, but offers the most powerful means we have for solving some of our most intractable social problems. From Babylon to the present, the history of finance has always been one of powerful innovation. Now a new generation of financial entrepreneurs is working to revive this tradition of useful innovation, and Palmer shows why we need their ideas today more than ever.

Traveling to the centers of finance across the world, Palmer introduces us to peer-to-peer lenders who are financing entrepreneurs the big banks won't bet on, creating opportunities where none existed. He explores the world of social-impact bonds, which fund programs for the impoverished and homeless, simultaneously easing the burden on national governments and producing better results. And he explores the idea of human-capital contracts, whereby investors fund the educations of cash-strapped young people in return for a percentage of their future earnings.

In this far-ranging tour of the extraordinarily creative financial ideas of today and of the future, Smart Money offers an inspiring look at the new era of financial innovation that promises to benefit us all.

Product Details

ISBN-13:	9780465064724
Publisher:	Basic Books
Publication date:	04/14/2015
Pages:	304
Product dimensions:	6.40(w) x 9.30(h) x 1.30(d)

About the Author

Andrew Palmer has worked at the Economist since 2007, and was its finance editor from 2009 to 2013. He is currently the Business Affairs editor at the Economist, where he is responsible for coverage of business, finance, and science. He has a master's degree in international relations from the London School of Economics and lives in London.

Table of Contents

PART I
Lessons Badly Learned
One. Handmaid to History
Two. From Breakthrough to Meltdown
Three. The Most Dangerous Asset in the World

PART II
A Force for Good
Four. Social-Impact Bonds and the Shrinking of the State
Five. Live Long and Prosper
Six. Equity and the License to Dream
Seven. Peer-To-Peer Lending and the Flaws of Finance
Eight. The Edge: Reaching the Marginal Borrower
Nine. Tail Risk: Pricing the Probability of Mayhem

Editorial Reviews

…fascinating…Palmer is a muscular, efficient writer; he relates in-person interviews and statistical evidence with ease and humor…Palmer's vignettes show how innovation can, and should, involve more than bankers getting rich, playing games and dodging rules.

The New York Times Book Review - Frank Partnoy

01/12/2015
As official national villain, Wall Street has recently been supplanted by other malefactors (such as the CIA, local police forces, and Ebola), yet the Great Recession has undeniably left finance with a tarnished reputation. Economist journalist Palmer hopes to burnish its image in this eloquent manifesto, highlighting current innovations in finance that promote social good. Wisely, Palmer begins by admitting Wall Street’s recent sins: namely, disastrously miscalculating the risks of subprime mortgages and triggering the global financial crisis of 2007–2008. Yet, as he observes, financial crises are nothing new, dating back to 33 C.E. Palmer argues that a world without finance (and thus without loans, credit, insurance, or investments) would be far worse. He points to how the Internet now allows individuals to bypass conventional financing, gives borrowers access to lower interest rates, and lets entrepreneurs obtain capital via crowdfunding. He also discusses social-impact bonds, wherein nonprofit organizations that, say, reduce recidivism pay off investors using the money saved by the government. Palmer responsibly notes the potential risks of such brave new innovations, spotlighting a not-so-novel innovation, catastrophe modeling for insurers, which could also be valuable, specifically for modeling risk in markets. This intelligent, balanced study of current innovations in finance does much to exorcise its recent demonization. Agent: Andrew Stuart, Stuart Agency. (Apr.)

Publishers Weekly

Bookforum
“Careful and sensible… As someone who was thrown into the deep end of business reporting at the onset of the global financial crisis, [Palmer] is acutely aware of just how dangerous finance can be.”

Robert Shiller, author of Finance and the Good Society
“Smart Money is an entrancing story about what is new and exciting—but almost invisible for most of us—in twenty-first century finance. A real inspiration for idealistic entrepreneurs, and for members of the finance and insurance profession who have felt humiliated by the financial crisis.”

Edward Glaeser, author of Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier
“This engaging and informative book provides a much needed rebuttal to the post-2007 hostility toward all forms of financial innovation. Andrew Palmer takes us on a tour of today's financial innovations, from social impact bonds to peer-to-peer lending, that illustrates the upside of creative finance. This book is crucial (and fun) reading for anyone who wants to understand both sides of the argument about financial regulation.”

New York Times Book Review
“Fascinating… Palmer is a muscular, efficient writer; he relates in-person interviews and statistical evidence with ease and humor. [His] vignettes show how innovation can, and should, involve more than bankers getting rich, playing games and dodging rules.”

Wall Street Journal
“A scintillating brief for financial invention… a cheerful and lucid Cook's tour.”

Breakingviews
“[Palmer's] optimistic perspective is refreshing… a welcome corrective to the prevailing conventional wisdom.”

CHOICE
“A welcome and inspiring counterargument to the post-2008 vilification of the finance industry. Interesting and well-written, the book shines a light on the virtues of financial innovation.”

Library Journal
“This book will satisfy the general reader and investor who wants to see the other side of the coin as it relates to financial innovation.”

Publishers Weekly
“[An] eloquent manifesto.... This intelligent, balanced study of current innovations in finance does much to exorcise its recent demonization.

From the Publisher

03/01/2015
Many blame the Great Recession on financial innovations that have created an overly complex financial system, but not journalist Palmer (The Economist). In this book, which discusses some the history of finance as well as opportunities for the future, Palmer shows how innovation has always been a part of this industry, starting with the creation of money itself. The first part of the work details some of the ways financial innovation has gone wrong, such as through collateralized debt obligations (CDOs) and high frequency trading (HFT), while the second part shows how these changes can be a force for good instead of greed. Examples include social-impact bonds (SIBs), which allow private investors to fund social programs, and peer-to-peer lending, which takes big banks out of the equation for small loans and allows individuals to borrow from and lend to one another. VERDICT This book will satisfy the general reader and investor who wants to see the other side of the coin as it relates to financial innovation.—Elizabeth Nelson, McHenry Cty. Coll. Lib., Crystal Lake, IL

Library Journal

2015-02-04
Palmer, the head of data journalism at the Economist, disagrees with those who see innovations like derivatives as responsible for recent financial bubbles and crashes, and he argues that the world needs even more financial innovation.In a survey of monetary and financial history, the author examines the development of financial products. These include advances in peer-to-peer lending, which remove banks as middlemen in transactions that are made possible, in part, by mathematized search functions related to data mining. Palmer identifies companies across the world—e.g., Lending Club, Transfer Wise and Zest Finance—that are moving into areas where banks and other lenders provide either predatory or very little service to their customers. Nonleveraged methods of financing, providing cheaper short-term finance using nontraditional forms of collateral, are being developed for those qualified—e.g., student lending, payday loans, housing and retirement finance. Palmer traces these innovative methods to the tradition of financial mathematics begun as early as the 13th century with Leonardo Fibonacci. The author explores the respective pioneering contributions of both Fibonacci and 17th-century astronomer Edmond Halley. The former worked out how to calculate the " ‘present value' of cash flows—that is, how much a future amount of money is worth today, given that money can earn interest in the meantime," and the latter helped develop the concepts of annuities and life tables for insurers. "The problem with financial innovation is not that products have original sin," writes Palmer, "but that the financial system is programmed to change these products in ways which make them more dangerous." As examples, he points to recent high-tech and mortgage bubbles. With state institutions apparently reaching their financial limits, the author sees plenty of room for expansion of innovations. An intriguing argument that can bear further study.

Kirkus Reviews