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

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.

Robert Shiller's book doesn't warrant some of the negative reviews on here.

In an age of talking heads and pundits who argue more so on the basis of philosophy than on any factual evidence, this book's clear and evidence based examination of the subprime crisis comes as a refreshing alternative. Shiller, a Yale professor of economics, overcomes any temptation to over complicate or to talk down to the reader and gives a frank and detailed assessments of the current mortgage mess, the reasons we're in this crisis, and the possible short and long term solutions.

While Shiller explicitly states his view on framing a short term bailout in the early chapters, he has not written a policy paper. Instead, the book is a collection of thoughts and ideas of what would strengthen our financial institutions for the future - ideas like cpi adjusted standards of accounting (unidad de fomento) to weather periods of inflation/ deflation, subsidized financial planning to encourage savings and prevent speculation, and government sponsored financial watchdogs to assist the private investor.

Interestingly, Shiller anticipated the anger and the frustration that many average mainstreet americans feel about the current crisis. He warns against excessive finger pointing at officials, borrowers, and lenders. For one thing, they were all trapped in a flawed incentive system. He points to the disaster of the German reparation after WWI as a warning against letting the desire to punish go rampant and cloud pragmatism in making policy. Instead Shiller makes practical recommendations and suggests that once we are out of the current mess, we should structure our financial institutions to prevent future crisis, design insurance against economic/financial downturn, and actively integrate economic theory in public policy.

A more controversial topics that Shiller touches on is the role of future markets and derivatives. Here, instead of opting with most financial writers who are now so enchanted with the Buffetian quote about mass financial destruction, Shiller recommends more derivatives and more future markets as a part of the "subprime solution." Although I am convinced by his argument that future markets with enough liquidity will reduce risk and offer hedging insurance against market disruptions, I am rather disappointed that Shiller did not offer an analysis of the argument that derivatives were a part of the "subprime problem." If more financial engineering is in fact a long term solution to financial problems, Shiller should have at least addressed the current negative perception with a sentence or two. I hope that this will be corrected in future editions.

Even though "The Subprime Solution" is not an all encompassing treatise of the current financial crisis, it offers strong insights, readability, and wisdom in a time of uncertainty.

Robert Shiller, the creator of the Case Shiller Home Price Index, comes to the subprime mess with certified authority and insight. The first three chapters are well written and enlightening. His comments about the long term buildup of the housing boom and its effect on the national psychology of the bubble are on target; he must be taken seriously on the present threat to the social cohesion of the country comparing its rendering to the Great Depression and his comments about the amplification of the bubble by the media will find many believers in this country. His criticism of Alan Greenspan is temperate and gentlemanly in that academic manner. His critique of OFHEO in not doing its job in reigning in Fannie Mae and Freddie Mac flies in the face of OFHEO's bracing 2004 and 2005 reports to Congress. Shiller takes on the easy targets, ignoring the real scoundrels, Chris Dodd and Barney Frank, and its Democratic establishment which ruled Fannie Mae for years. He admits as much in the epilogue; eschewing "finger-pointing;" acknowledging with italicized emphasis that " there have been evildoers." It is just not the Yale way.

Small book, with large type and many spaces.
Out of date given the recent economic crisis.
Not very interesting.

Thie book tells the reader what we already know about the sub-prime lending problem..... stupid buyers and greedy lenders. Don't waiste your time reading this one.