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The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It |  | Author: Robert J. Shiller
Publisher: Princeton University Press
Category: Book
List Price: $16.95
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Rating:  36 reviews
Sales Rank: 83731
Media: Hardcover
Edition: First Edition
Pages: 208
Number Of Items: 1
Shipping Weight (lbs): 0.5
Dimensions (in): 8.5 x 5.7 x 0.9
ISBN: 0691139296
Dewey Decimal Number: 332.722
EAN: 9780691139296
ASIN: 0691139296
Publication Date: August 4, 2008
Availability: Usually ships in 1-2 business 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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Showing reviews 1-5 of 36
 A Good Book... March 25, 2010
William Dahl (Redmond, OR)
2 out of 2 found this review helpful
I am an admitted follower of the work of economist Dr. Robert J. Shiller.
His partial bio reads like this (From Yale University): "Robert J. Shiller is the Arthur M. Okun Professor of Economics, Department of Economics and Cowles Foundation for Research in Economics, Yale University, and Professor of Finance and Fellow at the International Center for Finance, Yale School of Management. He received his B.A. from the University of Michigan in 1967 and his Ph.D. in economics from the Massachusetts Institute of Technology in 1972. He has written on financial markets, financial innovation, behavioral economics, macroeconomics, real estate, statistical methods, and on public attitudes, opinions, and moral judgments regarding markets"
Shiller, Robert J. The Subprime Solution - How Today's Global Financial Crisis Happened and What to Do About It, Princeton University Press, Princeton, New Jersey Copyright © 2008 by Robert J. Shiller
I finally got around to reading Subprime Solutions - How Today's Financial Crisis Happened and What to do about it. (Princeton University Press, Princeton, New Jersey USA Copyright (c) 2008 by Robert J. Shiller
Admittedly, Shiller's other recent books entitled Irrational Exuberance (2005) and Animal Spirits (with George Akerlof - 2009) are terribly tough acts to be compared against. My review of Animal Spirits is here. I am devouring Irrational Exuberance at the moment.
I enjoyed this book yet, found many of the proposed solutions (continual workout mortgage, equity insurance for homeowners etc.) lacking in their application to the new dimensions of the U.S. homeowner crisis that now exist, in 2010.
Yet, Shiller always has insights that I find appetizing. I always learn from his work. Clearly he remains both a central and highly regarded advocate for the "unfinished business" that U.S. policy makers must embrace to thwart the ongoing loss of home ownership by the American middle-class and establish safeguards to this will not happen again.
Here are some excerpts from Subprime solutions that I really appreciated. I'll let Shiller's words speak for themselves:
"More importantly, this crisis has set in motion fundamental societal changes-changes that affect our consumer habits, our values, our relatedness to each other. From now on we will all be conducting our lives and doing business with each other a little bit differently." P.1.
"Allowing these destructive changes to proceed un impeded could cause damage not only to the economy but to the social fabric - the trust and optimism people feel for each other and for their shared institutions and ways of life - for decades to come." P.2
"Today the typical household has as its principal investment its home. A home represents a highly leveraged exposure to a single, stationary plot of real estate-about the riskiest asset one can imagine. The standard mortgage provides no protection against difficulties in repaying the lender due to changes in the marketplace. But mortgages can and should be designed to compensate for these changes by including provisions to ensure homeowners against their major risk." P. 22.
"strengthen the social fabric, and create the conditions for greater economic stability and growth." P. 22
"Real home prices for the United States as a whole increased 85% between 1997 and the peak in 2006." p 32
"The most important single element to be reckoned with in understanding this or any other speculative boom is the social contagion of boom thinking, mediated by the common observation of rapidly rising prices. This social contagion lends increasing credibility to stories - I call them "new era" stories-that appear to justify the belief that the boom will continue." P. 41.
"He (Greenspan) does not seem to respect research approaches from the fields of psychology or sociology." P.43
"What seems to be absent from the thinking of many economists and economic commentators is an understanding that contagion of ideas is consistently a factor in human affairs." P.43
"The losers are disproportionately those people who have prudently been staying out of the housing market bubble." Pp.92-93.
Religion and response to the Depression - "Even religious thinking returned to more traditional forms. The public amusement at religious foibles so evident at the time of the 1925 Scopes trial, when the Bible was put on trial versus the theory of evolution, was fading, and being replaced by a desire to find in religion some comforting interpretation of life." pp. 96-97
"We must always be concerned about public perceptions of fairness and evenhanded treatment, about public confidence that our economic system is moving forward to provide opportunities for all. That confidence is being seriously eroded in today's subprime crisis." P.100.
"The loss of trust and belief in the economic system can have consequences not only for the economy itself, but for the social fabric as a whole, leading us all to suffer needlessly. P. 101
"The balance sheet problems into which people fall if their homes lose value are purely financial losses. But they can be converted into substantial real losses to the economy if they are allowed to destroy public confidence." P.105 -
"There is an inherent unfairness in our economy, evidenced by its sharp income inequalities." P.106
"We have to be willing to spend money on securing economic justice. That means allocating resources to determining-to the extent that this is possible-who among mortgage borrowers were misled and mistreated, and then focusing the bailouts on them." P. 112
"In a similar vein, the human sciences- psychology, sociology, anthropology, and neurobiology-are increasing our understanding of the mind by leaps and bounds, and this knowledge is now being applied to finance and economics. We have a much better grasp of how and why people make economic errors, and of how we can restructure institutions to help avoid these errors. Pp. 118-119
"Denying the importance of psychology and other social sciences for financial theory would be analogous to physicists denying the importance of friction in the application of Newtonian mechanics." P. 119
"A new kind of home mortgage that I call a continuous-workout mortgage would have terms that are adjusted continuously (in practice probably monthly) in response to evidence about changing ability to pay and changing conditions in the housing market." P. 157
"Decreases in home values can reduce or even eliminate a homeowner's equity, making it difficult or impossible for the owner to refinance with a new mortgage. The homeowner may conclude that it is impossible to move to another home, even if such a move would allow her to take advantage of a lucrative job offer. The mortgage .I' may eventually end in default, especially since the homeowner may decide that it is just not worth struggling to make further payments on a mortgage when she can just walk away from the whole mess." P. 161
"Louis Uchitelle, in his 2007 book The Disposable American: Layoffs and Their Consequences, discovered that those on whom this misfortune falls are truly suffering -but suffering mostly in silence, out of a sense of shame and of being at fault." P. 164
"Risk-avoidance behavior also has an impact on the behavior of city, regional, and even national governments. Fearing the uncertainties associated with new economic development initiatives, these governments typically choose to play it safe and model themselves along conventional lines. They slavishly imitate other successful entities when they ought to be cultivating their locales as vital centers for specific emerging technologies or industries." P. 168 -
"The key to long - term economic success is rightly placed confidence in markets. In contrast, bubbles are the result of misplaced confidence." P. 171.
A great read written to be consumed by a broad audience. I recommend it.
New Deal 2? February 15, 2010
Jason D. Kjellson (Monument, CO USA)
0 out of 2 found this review helpful
Recognizing Robert Shiller's name from the Case/Shiller indices etc.... I went to this book for research purposes. His discussion and analysis of the historical is spot on. He really gets into trouble when he starts talk solution and it boils down to this. FDR squared. He wants a second new deal!
For my part, I don't think the solution is a return of the HOLC and more government dollars thrown at more unqualified borrowers. Rather, we need less government dollars and tighter risk controls that only private investment can bring. Our problem was securitization and complete ignorance of the underlying risk of derivative pools coupled with an incredibly ignorant government. Shiller actually places no blame on government for all of this which is a joke. Congress was warned by the Bush administration and the response was that Bush was trying to find problems where none existed.
You are paying for 2 chapters here. The rest will have your blood boiling, unless you are a Socialist.
 Good book on subprime causes and solutions January 10, 2010
Jacob Wolinsky (monsey, ny)
0 out of 1 found this review helpful
I have been doing a series of book reviews on the financial crisis. The latest book that I have read is The Subprime Solution by Robert Shiller. I was attracted to the book, after reading Irrational Exuberance by Dr. Shiller, which is still one of my favorite books. The Subprime solution is not a new book. It was released in 2008 well before the financial crisis reached its peak. When I asked Dr Shiller for the book, he told me "Subprime Solution seems to be slipping from public attention, but it is all the more relevant now I think." I could not agree more.
The book can be divided into three parts:
In the first segment of the book, Shiller describes what lead to the subprime solution. While to most investors this may seem like a review it is useful to read Shiller's account of what led to the subprime problem. In addition, this section is valuable to the layman who is unfamiliar with the course of events that lead us to the situation we are in now. What I love about Shiller's writing style is despite being an academic he is able to communicate on a simple level that most Americans would understand.
The second half of the book deals with the short term to the subprime mess. Much of the short term fix entails essentially a bailout. Dr. Shiller argues that these bailouts are necessary. He foresaw what would unfold if the Government failed to act. Shiller writes "bailouts of some sort are a necessary part of the subprime solution. To avoid an economic crisis that would destroy public confidence and possibly lead to systemic failure". I only wish the Government had heeded this warning before the collapse of Lehman Brothers. Had the Government acted earlier it would have cost far less, and the damage to the US and global economy would likely not have been as severe.
The third part of the book contain Dr. Shiller's long term solutions to avoid problems that lead to reckless subprime lending in the future. Dr Shiller describes this as "democratization" of the financial market.
Some of these solutions include
1. Providing lower income, and less educated people with financial information. Shiller believes that this would have prevented many subprime borrowers from taking out loans.
2. Specifically Shiller calls for a new financial Watchdog which would provide people with financial information. This agency would be similar to the consumer protection agency which protects people from unsafe products.
3. Creating new instruments to provide people insurance in case of their personal economic problems such as home price declines and unemployment
The ideas contained in third part of the book, are why I believe Shiller described the book as more relevant than ever. As the debate in Washington about financial reform continues many ideas have been proposed. While Shiller's ideas might be controversial and would not solve all the problems that led to the current financial crisis they definitely deserve an examination. While Shiller was not the first person to propose a consumer protection agency, I believe his endorsement of the idea may be a reason why it has become a key platform of President Obama's financial reform proposal.
The best part about Dr Shiller's book is his understanding of human psychology and how it affects the economy and can produce bubbles. As a value investor/ contrarian, I believe human psychology plays an important role in figuring out what investments to buy or to avoid. Dr Shiller foresaw the subprime problems and the housing bubble long before the full brunt of it unraveled. This is not the first time Shiller has predicted a bubble. Robert Shiller called the stock market bubble several years before it burst.
Many people now are playing Monday morning quarterback and are claiming that the dot com bubble and housing bubbles were obvious in hindsight. Yet, most experts including the nation's most prestigious financial institutions, Government agencies, academics, and investors did not foresee either bubble. I wonder where all those people were while the bubbles were building up- maybe buying AOL or Citigroup stock. Dr Shiller is one of the only individuals who predicted both bubbles before they burst. My advice is next time Dr shiller says we are in a bubble; to take note.
a new look on the matter November 17, 2009
Bernd Kotz (Essen, Germany)
Robert Shiller is taking us back to the wreckage of the housing market. He tries to find the reasons and problems of the new situation. He begins with the history. The last housing crises date from the early twenties of the last century. All the mayor institutions we have are dating back to the time after 1930 (SEC, Fannie Mae and the deposit insurance for bank accounts). It was established with the New Deal. That was the last mayor cut in the economy. He thinks that a new cut must takes place for a brighter future. His steps are a better financial information infrastructure, a wider array of risk management over financial markets and more financial ancillary services in the mortgage market to protect the people. He creates for the housing market a new price index which is very helpful for the future. He explains why the housing market is no scarce resource and that the prices tend to be constant cover time.
The reasons for the bubble are separated in two parts. The first part includes the psychology effects. He calls it the social contagion. You can refer it to the neuroeconomics. It includes the psychological and social effects on the behavior of the people. Like the social effects that leads to the great depression. The loss in the social confident and the economic system is more relevant than a decline in the house prices.
His second part includes the financial background. The new measurement of house prices in inflation baskets, support for the people about insurance matters and the new market for risk management. He begins with the little steps of our financial background. The crisis begins with the banks and will end in the banking sector. I think that the miscalculation of the credit risk and securitization of financial instruments are the mayor problems. To finance long term debts with short term instruments, this was the reason for the collapse of the mayor banks.
 Innovative look at countering excessive market expansion July 5, 2009
Ross Raffin (Bay Area, CA United States)
This book is one of the best crisis books focuses almost entirely on the housing market. The "solutions" given are both genius and revolutionary. The Subprime Solution should be the ultimate strategy guide to how we can reform the housing markets.
Showing reviews 1-5 of 36
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