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The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It

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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.

The Title is Opposite the Message -
This book has a depressing view of our current economic crisis. A good read for anyone that is too cheerful.

The parallel he makes between the trust lost by promising everyone could own a home to the repartiation payments after WW I is a bit of a stretch.

Good book though.

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Mostly Blather -
Shiller blames the subprime crisis on the irrational exuberance that drove the 1990s stock bubble and the 2000-2007 housing bubble. Restoring confidence will require bailouts targeted at low-income victims of subprime deals. Longer-term solutions will require inhibiting the formation of bubbles and limit risk - better financial information, simplified legal contracts and regulations, home-equity insurance, income-linked home loans, and new measures to protect consumers against hidden inflationary effects.

Mortgage originators, planning to sell off the mortgages to securitizers, stopped worrying about repayment risk, and sometimes enticed the naive, with poor credit histories, to borrow in the subprime market. High home prices generated a glut on the market and prices declined at an accelerating rate. Meanwhile, mortgage rates began to reset after initial "teaser" periods ended, and defaults surged.

The lowest price homes have shown the greatest price increases (and subsequent falls), probably due to their linkage to subprime loans. Ratings agencies were not about to cut ratings on securitized mortgage products based on theories that the increases could not continue, that prices might fall.

There's some good material in the "The Subprime Solution" - however, most of the pages are taken up in an obvious "explanation" of why everyone jumped on the bubble bandwagon.

subprime book -
This book is light on new data(a couple of graphs) and heavy on theoretical solutions,many only peripherally related to the present crisis. There is no discussion of resource depletion. The idea of insuring home equity and life income underestimate the cost of administration and fraud. It is a quick easy read,a few interesting ideas such as teaching kids to think in inflation units.

Would you trust this man? -
Trusting any Santa Claus of high finance in the midst of such massive failures of a bubble-prone financial system seems suicidal.

Shiller ends on a characteristic utopian-ideologue note: "Imagine our society equipped with a well-established information infrastructure that reached out to all its members, derivative markets for both owner-occupied and commercial real estate, well developed retail products, like continuous-workout mortgages, home equity insurance, and livelihood insurance, that facilitate management for individuals; and default options that naturally lead people to use risk-management devices intelligently.

"Our society could look forward to nothing less than more stable markets and, in turn, a more rational economy. We would eventually find ourselves forgetting that the kind of massive financial instability infecting our everyday lives is even a potential problem. Modern finance, applied democratically, can relegate these problems to history just as modern medicine, applied widely, has left us forgetting that epidemics of yellow fever and diphtheria ever raged among us."

I say, just stick with reading the ever-more shocking revelations of a good newspaper. Common sense answers applied with determination is the crying need. But such an approach doesn't follow the play book of new economy thinking and ideology that has got us into so much trouble for over a decade. Shiller still swims with that current, follows that herd. In the face of the real facts unraveling day over day, Shiller comes across as snake oil, no matter how good-hearted and liberal-minded.

Shiller's ideas appear innovative and gutsy, but he seems to have drank the cool-aide of high finance down to its dregs. His answers for our problems go deeper into that jungle with greater and greater trust demanded. Dr. Shiller, clean out the messy stables of your herd first--as Hercules had to do to prove himself--then your ideas may have relevance. As it is, you clearly are not facing up to the major challenges of your field--real-world failings that need to be addressed, hence your book functions more as a distracting red herring.

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Financial Democracy -
For Prof. R.J. Shiller, the root of the subprime mortgage crisis in the US is a myth, the belief that real estate prices must strongly trend upward for demographic reasons.
He proves that the price of real estate, to the contrary, is trending lower. What went up are the quality and the dimension of the average individual houses. But what about `land'? Didn't Mark Twain recommend strongly: `Go for land. They've stopped producing it.'? R.J. Shiller remarks cleverly that only 2,6 % of US land is used for urbanization.
Another factor of the bubble was psychological: the human herd instinct. There was a social contagion of boom thinking.
A third, more specific, factor was the deliberate governmental policy to promote home-ownership as much as possible. This should be good for the Party.

When the real estate bubble burst, it disrupted immediately the credit markets. Aggressive mortgage lenders never worried about repayment risks. They repackaged the mortgages, got top ratings from the rating agencies and sold their packages to third parties all over the world.
But even more importantly, the crisis damaged the `social fabric', the way of life of millions of families and also human relationships (through aggressive creditors). It created an atmosphere of distrust, of hoarding, with runs on banks; in one word, it gave rise to a psychological environment that could lead to a severe and long depression, which would hurt all citizens. Therefore, the subprime crisis must be solved.

Prof. R.J. Shiller makes a distinction between the short term and the long term solution.
In the short term, there should be a massive bail-out in order to prevent an escalation of the crisis and of the economic downturn.
In the long term, the US government should create a basic social contract and protect every citizen against major misfortune. It should impose financial democracy through standardized full disclosure documents so that everybody should get better information about all the risks involved. Without affecting individual privacy, indicators should be created about the real value of real estate. Those should lead to a more efficient pricing of houses and to a stabilization of the market. Prof. R.J. Shiller did not only recommend these policies, but created an indicator himself.

With an open and clear-sighted mind, Prof. Shiller wrote a small, but essential, book about a dramatic worldwide crisis, without losing the `human touch'. It is an essential read for all those interested in the future of mankind.