The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about Itby Robert J. Shiller
Pub. Date: 08/04/2008
Publisher: Princeton University Press
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 responsea restructuring
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 responsea 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 bubblesin 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 messand how we can get out.
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Table of Contents
Chapter 1: Introduction 1
Chapter 2: Housing in History 29
Chapter 3: Bubble Trouble 39
Chapter 4: The Real Estate Myth 69
Chapter 5: A Bailout by Any Other Name 87
Chapter 6: The Promise of Financial Democracy 115
Chapter 7: Epilogue 171
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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.