The Subprime Solution How Todays Global Financial Crisis Happened and What to Do about It
The subprime mortgage crisis has already wreaked havoc on the lives of millions of people and now it threatens to derail the U.S. economy and economies around the world. In this trenchant book, best-selling economist Robert Shiller reveals the origins of this crisis and puts forward bold measures to solve it. He calls for an aggressive response–a restructuring of the institutional foundations of the financial system that will not only allow people once again to buy and sell homes with confidence, but will create the conditions for greater prosperity in America and throughout the deeply interconnected world economy.
Shiller blames the subprime crisis on the irrational exuberance that drove the economy’s two most recent bubbles–in stocks in the 1990s and in housing between 2000 and 2007. He shows how these bubbles led to the dangerous overextension of credit now resulting in foreclosures, bankruptcies, and write-offs, as well as a global credit crunch. To restore confidence in the markets, Shiller argues, bailouts are needed in the short run. But he insists that these bailouts must be targeted at low-income victims of subprime deals. In the longer term, the subprime solution will require leaders to revamp the financial framework by deploying an ambitious package of initiatives to inhibit the formation of bubbles and limit risks, including better financial information; simplified legal contracts and regulations; expanded markets for managing risks; home equity insurance policies; income-linked home loans; and new measures to protect consumers against hidden inflationary effects.
This powerful book is essential reading for anyone who wants to understand how we got into the subprime mess–and how we can get out.
User Ratings and Reviews
3 Stars The man knows housing
In a nutshell, economic crisis ultimately was not caused by housing going down, but by its going up over so long a time that borrowers and lenders alike made unwise choices, making a crash inevitable. Why this happened when it did is not clear, although better regulatory oversight would have prevented it. The short term solution is subsidized mortgages. Like a stimulus, this merely transfers future purchasing power to the present, but is nonetheless necessary to fulfill the implied contract between a government and its citizens to reduce hardship.
1 Star Subprime Solution – Robert Shiller
The shipping source I think in England was far below your standard, they missed shipping dates and informed well after the Book should have arrived. Their email responses are not “customer service friendly”, I will not order a book from them again, if they are the sole choice I will go elsewhwere.
3 Stars Provocative analysis of the financial crisis
Robert Shiller, Professor of Economics at Yale University, has written an intriguing book about the financial crisis.
He writes of the US housing slump in the 1980s, “All this could have been prevented if people had simply adopted inflation-linked mortgages, but the public seemed unable to grasp the concept.” He seems to be blaming the public, for having imperfect information. But if markets only work when everyone has perfect information, then markets don’t work.
Excessive lending and speculation in housing created the house price boom of the early 2000s. Shiller blames `the contagion of market psychology’, a contagion without borders because of capitalism’s global nature. But the cause was not `market psychology’, but the globalised financial system which provided the opportunities and incentives for speculators. The system created the psychology, not vice versa.
Shiller proposes to revamp the financial system: improve the provision of financial information, extend the scope of financial markets to cover a wider array of economic risks, and create retail financial instruments to provide greater security to consumers. He defends the top executives in the financial sector and calls for extending and developing financial markets. But even more opportunities and incentives to speculate would lead to an even bigger crisis next time.
Yet he does make some sensible proposals, like improving insurance against unemployment and illness. He says that to restore confidence, capitalism must bail out the low-income victims of sub prime mortgage deals and support homeowners, to prevent mass evictions. He opposes bailouts to maintain high values in the housing market, stock market, land market or any other speculative market.
He points out that unfair land use restrictions benefit landowners by keeping land prices high, preventing new construction. We need cheaper land, so that we can build more homes.
But of course if capitalism could do all these good things, it wouldn’t be capitalism.
5 Stars Interesting Perspective on the Financial Crisis
Robert Shiller’s “The Subprime Solution” provides an interesting and important perspective on the financial crisis. While other commentators focus on the individual products and entities that contributed to the crisis, Shiller takes a broader view. He asks, “Why did so many people across America use risky adjustable-rate mortgages to buy houses they couldn’t afford? Why did Wall Street clamor for collateralized-debt obligations based on these mortgages?” His answer: a flawed collective belief that housing prices in America would rise continually. This conclusion is important in itself, for it flies in the face of conventional economic wisdom. According to Shiller, investors are not eternally rational but subject to periodic infection by social contagions like the housing bubble.
Shiller complements this analysis with a visionary explanation of mechanisms that could be used to minimize the effect of real estate bubbles in the long run. While this explanation is brief (the book is well under 200 pages,) it leaves the reader with plenty to think about.
My only criticism is that the book could use more analysis of the psychology behind the current bubble. Shiller asserts that the expansion of capitalism in China and India somehow affirmed Americans’ notion that the land available for housing is scarce and thus valuable. This just doesn’t seem plausible. Americans are no doubt aware how Chinese growth can affect the price of commodities like oil, but it seems highly unlikely that Asian investors are going to start buying up plots of land in Pittsburgh and Peoria. Overall, however, the book is a great read.
5 Stars The Crisis and financial democracy
Professor Shiller is a leading figure in behavioural finance and this boook will certainly maintain that prominent position. The book argues that free markets are both the cause and the potential solution to our current woes. In reading the latter part of the book I was constantly reminded of Friedman’s “Capitalism and Freedom” with its warning that markets are more than just a great allocative mechanism, but also a engine to disperse political power from a narrow political elite. Many of Shiller’s ideas for hedging house price risk have already been taken up (admittedly in a small way) via the Case-Shiller house price index. I think this book, especially in its latter part, can serve as a blue-print for a wider dissemination of “financial democracy” via disability insurance, etc. I have heard it said that the financial crisis has brought out the best of Gordon Brown as Prime Minister. It has certainly produced some of Professor Shiller’s finest writing. Let us hope Brown and Shiller do not have cause for further improvement in the near future.
William Forbes (Loughborough Business School, England)
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