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Posted February 23, 2009
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Provocative analysis of the credit crunch
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.
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