Recently, at the Macroeconomy and Finance in China Conference held by the Macro Finance Research Program at the University of Chicago’s Becker Friedman Institute for Economics and Tsinghua University School of Economics and Management, National Business Daily interviewed Thomas Sargent, 2011 Nobel Prize recipient and professor of economics at New York University.
Professor Sargent mentioned China is at the forefront of the world in the field of fintech and has developed very rapidly. As an academic, he always aims to explore and understand things. And it’s very fascinating to observe an economy like China’s that’s seeing rapid changes in the overall financial landscape and seeing how it responds to it.
China plays a leading role in fintech
Over the past years, new finance including fintech, internet finance and blockchain have seen rapid growth, but also many challenges too. Regarding the supervision of the new finance industry, could you share your recommendations?
Professor Sargent answered that he saw some problems in blockchain, cryptocurrencies. For cryptocurrencies, there is lots of advertising and promise, which has gone ahead of what’s been realized. There are serious technical problems that involve the cost of running the system and many legal questions too.
About the application of artificial intelligence in the field of peer-to-peer lending and small and micro finance, Professor Sargent said, China’s really been a worldwide leader in applying artificial intelligence to internet funding and microfinance. It was very important in terms of lowering costs of doing transactions.
Professor Sargent also mentioned a colleague at MIT. “He believed that in many very poor societies, there will be huge benefits to getting very poor people access to loans which they didn’t have. For example, in very poor villages, who had ideas to start a business, but they couldn’t get the money. He and some other people were doing experiments to try and show how powerful it was. At a very low level, they didn’t have much money, but they showed they were very promising.”
“They set up systems in these villages where people could get a reputation for repaying even small loans. Because if they had a reputation for repaying, they could get the loans. If they couldn’t get the loans because they didn’t have the reputation. It’s like the chicken and the egg.
He also mentioned Ant Financial doing this. “It is with millions of people. Through artificial intelligence and machine learning build social credit system. China is the leader in this and it’s very exciting.”
Professor Sargent said, as an academic, he always aims to explore and understand things. And it’s very fascinating to observe an economy like China’s that’s seeing rapid changes in the overall financial landscape and seeing how it responds to it. It is useful. As economists, they always say, they always love markets in a way, but here we’re seeing experience with people learning, it’s also learning by doing when you create new markets, and it’s very revealing to have this type of evidence for a scholar like him to draw upon.
Encourage information sharing while protecting privacy
To Professor Sargent, China is indeed at the forefront of the world in the field of fintech and has developed very rapidly. However, he also pointed out that Fintech faces some challenges while developing.
He said, using artificial intelligence to figure out who is creditworthy, and the like, is important to support financial transactions but at some point, it also raises problems about privacy. This isn’t special to China, it’s a problem worldwide. How do we on the one hand encourage this type of information sharing that’s critical to financial transactions while at the same time figure out ways to protect privacy? This is a tremendously challenging problem going forward.
For example, Professor Sargent was in the US Army as an army officer. To become an officer, he needed to get security clearance from the army. So, they checked his bank accounts and loans to know his credit and financial status. The information they wanted to obtain from his bank account was private.
He also talked about a Chinese scholar, who is a cryptographer, who’s working on how to transmit some information but hide it. “But that’s something government regulators are going to get involved in in every country. And different people have different attitudes about where the line on this privacy is. Even my wife and I have different attitudes. An example would be – this is something that annoys her, but I like – you go to Amazon and order a book, and Amazon comes back and says, ‘we also think you’d like this book’, and they’re right. I find that great and my wife finds that creepy.”
In addition, Professor Sargent also shared his recent research topic and progress with us. He worked with Lars Peter Hansen, 2013 Nobel Prize recipient on developing methods for modeling economic decision-making in environments where uncertainty is hard to quantify and exploring the consequences for models with financial markets and characterized environments in which the beliefs of economic actors are fragile. He said they hoped to develop ways to incorporate this caution into economic models. To what extent we will be cautious depends on how much we care about it and how we want to do it.