The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It | 
 enlarge | Author: Robert J. Shiller
Publisher: Princeton University Press
Category: Book
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Rating:  1 reviews
Sales Rank: 3535
Media: Hardcover
Pages: 208
Number Of Items: 1
Shipping Weight (lbs): 0.9
Dimensions (in): 8.5 x 5.8 x 1
ISBN: 0691139296
Dewey Decimal Number: 332.722
EAN: 9780691139296
ASIN: 0691139296
Publication Date: August 24, 2008 (In 3 Days)
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Product Description
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.
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| Customer Reviews:
Audacious in its proposals August 19, 2008
Dr. Lee Carlson (Saint Louis, Missouri USA)
1 out of 2 found this review helpful
The first thing that can be said about this book is that notion of a financial bubble is not really explicitly defined. Instead its author takes it as a given that there was a housing bubble and it aggravated the current "credit crisis". One could perhaps debate the author's contention is this regard, if one examined for example the relatively stable housing markets in many areas in the country at the present time. His emphasis in the book is not on the quantitative analysis of financial bubbles but rather in what measures can be taken to alleviate the effects of the housing bubble. The study of these effects has taken on major importance in the last year, and much has been written about them. This book, although short, is interesting at least from the standpoint of the audacity of the solutions that the author proposes.
One of the best features of the book is the author's discussion of the importance of technology for the financial community. He looks forward to the integration of behavioral finance in the mathematical modeling of the financial markets. This is just getting started, and those involved can look forward to some very interesting developments along these lines. It is always refreshing to see new paradigms being used at a practical level, and behavioral finance shows great promise in more accurate modeling of the financial markets.
As part of a long-term solution, the author proposes the "democratization" of the financial markets but his proposals in this context are somewhat annoying since he, as do most other writers, frequently refers to the "general public" in a manner that implies a complete disrespect for the members of this group. It is interesting that no matter what the topic or ideology, its advocates always refer to the "general public" as some sort of class or entity that they do not belong to, but that is clearly lacking in intelligence and in need of their assistance. It is though every interest group feels that those outside of its political and intellectual logosphere need "enlightenment" or guidance of some sort. The author for example makes the statement that "the public, of course, does not understand this basic economic fact" when discussing why their ignorance resulted in a massive speculative bubble. Addressing "the public" (whoever that is) in this way only exposes the author's elitism. It does not help at all in elucidating the need for the "democratization" of the financial markets.
And assuming that this need is a valid one, it would be interesting to see just what actually would be made available for this purpose. For example, anyone who has worked in mortgage modeling knows of the need for more accurate data on house prices. Would the author be willing to make the Case-Shiller index available to anyone who wants it, without any financial compensation to the firm that currently has proprietary rights to it? When reading the book, it would seem that only financial tools produced as the result of government funding would be available without charge to anyone that was interested in using them. An immediate question arises as to whether these public tools are better than the ones developed by private firms or institutions. If they are, and they are recognized as such, then financiers and investors will use them instead, eliminating the need for the private tools. If they are not, then the people who use them are getting sub-standard advice, and this will aggravate or cause another financial bubble, since clearly the author believes that bubbles are caused by information of poor quality or wildly optimistic estimates of future prices.
The author is in favor of governmental bailouts, citing actions taken in the great depression as evidence, and the need for financial "stablity" (the latter undefined in the book). But the ability of the governmental institutions to fix the problems that arose out of the great depression is not apparent when reading this book or indeed many others on the same subject. Yes, these institutions were put in place because of the great depression, but this reviewer is not aware of any evidence that they played an actual role in ending it. Just because they were invented with the intent of solving the financial problems of the great depression does not mean that they actually did. Other factors may have played the major role, these factors not being known, with the result of a false imputation of success to these governmental institutions. Indeed, there are a few ideological groups who claim that it was the gearing up for the Second World War that effectively ended the depression.
If government is to be more involved in matters of economics, maybe a good start would be to pass what might be called a "Financial Courage Act", which would be a massive educational program to instill in all citizens a recognition and appreciation of the extreme volatility of the financial markets of the twenty-first century. This would not be a propaganda campaign waged to protect Wall Street economic interests, but instead a long-term project that would educate everyone on why the financial markets take the form that they now do and thus alleviate some of the anxiety associated with rapid change. This reviewer cannot see anything intrinsically wrong with financial bubbles, and if we all understand them as just another aspect of our financial deal making we will not be emotionally overwhelmed when they do occur. When Roosevelt made his speech on the debilitating effects of fear, he was correct, and that speech might have been his greatest contribution to the economic turmoil of his time. The citizens of his generation had the courage to face up to their difficulties and move on, and so there is no reason why everyone at the present time cannot do the same.
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