The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It |  | Author: Robert J. Shiller
Publisher: Princeton University Press
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Rating:  33 reviews
Sales Rank: 21026
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 4, 2008
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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 33
 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.
Very interesting April 15, 2009
R. Veludo (Portugal, Lisbon)
Good and grounded analisys, well written, interesting perspective about the financial and real estate crises. Good sugestions for the outcomes and structural changes in the financial system and economy.
A Moving and Innovative Work April 7, 2009
Solomon Rabinowitz (Portland, Oregon)
1 out of 1 found this review helpful
Everyone nowadays seems to agree on the root cause of the current economic crisis; it is the bursting of the real estate bubble. But what caused this bubble? What hazard does its bursting pose to the solvency of financial institutions? What steps can be taken to heal the economy and prevent similar calamities in the future?
In The Subprime Solution, Robert J. Shiller proposes answers to these questions. The answers that he offers represent a furthering of earlier research that he has done on the subject of bubbles that have occurred in other markets besides real estate. In the first edition of his earlier work, Irrational Exuberance (2000), Shiller correctly predicted the bursting of the bubble in technology stocks. According to Shiller, both the technology bubble and the housing bubble are due to the same basic cause, namely widespread and misplaced confidence among the investing public. As such, they can be characterized as speculative bubbles, the "speculative" modifier being the key point that distinguishes Shiller's analysis from other competing theories.
Shiller explains that speculative bubbles are psychological in origin. When a home buying frenzy ensues in a given locale, home prices rise due to increased demand. The price increases support the widespread belief that declines in real estate value will not occur, in turn feeding the buying frenzy. In effect, the phenomenon is a vicious circle, which feeds upon itself. Eventually, the prices of homes become inflated far beyond what is explicable in terms of building costs, land availability, and other economic fundamentals. It is under such conditions that the market is ripe for a downturn.
The misplaced confidence in the real estate market not only affected individuals, but it affected lending institutions as well, and here lies the key to the current crisis. For years, there has been a culture among lenders of rubber-stamping home loan applications, and a failure take the obvious steps of verifying the borrower's income and credit history. These practices resulted from a misplaced confidence in the quality of the home as an instrument of collateral, and accordingly the expectation that cases of default would not cause a significant loss to the lender. Lenders have relied on economic models that failed to take into account the devastating effects of a sharp downturn in home prices, on the assumption that such downturns would never occur.
What can be done to heal our economy, and to prevent similar calamities in the future? The first and obvious answer is better education for both individuals and institutions as to investment risks. Another, more controversial answer is bailouts, and Shiller supports their use. Shiller is quick to admit that bailouts are unfair, in that they penalize those who behave responsibly and forgive the misdeeds of the reckless. Interest rate cuts designed to ward off foreclosure for those with variable rate mortgages are one type of bailout. These represent a hidden transfer of wealth from the conservative money-market investor to the over-leveraged home buyer, and as such are unfair. But, according to Shiller, the rate cut is a necessary evil to prevent a devastating loss of confidence in our financial institutions.
We have all been led to believe that a house is a solid investment, and prominent writers on personal finance for the lay public have historically stressed this point. But for most individuals and families, home buying violates all the standard principles of investment science; it is a single, high-value undiversified asset with no available means to hedge changes in price. In light of these considerations, is there anything that can be done to make the risks for home buyers more reasonable? According to Shiller, there is, and this takes us to the most exciting and innovative part of of his work. In the chapter entitled the Promise of Financial Democracy, Shiller proposes the creation of new financial instruments that could lend sanity to the real estate markets. A detailed understanding of such instruments demands more knowledge of the field of finance than is at the disposal of most readers, so some explanation is in order.
If you ask a homeowner in New York what he thinks about the stability of his real estate investment, he is likely to tell you that it is solid. He lives in the place, and to own it he has had no choice but to leverage himself and accept great risk. It is difficult for a person in such a situation to make a disinterested assessment of risk. He is affected by the psychology of his neighbors, who are similarly leveraged. Ask the New Yorker if he would own a house in Los Angeles, where he has no personal stake, and he is likely to say, "No way. Too many earthquakes and fires." It would be desirable for the New Yorker to be able to register his unfavorable opinions about Los Angeles and take short positions in the LA housing market. Such would exert downward pressure on house prices in Los Angeles, and subject their prices to a more democratic bidding process. The introduction and widespread trading of new types of real estate derivatives, which would allow investors to take both long and short positions, can be expected to do a positive social good; they would lead to better price discovery in the real estate markets, and could ward off the formation of speculative bubbles.
In practice, most homeowners would not want to take any kind of speculative position, either long or short, on the housing market in other cities. However, Shiller argues that such speculative instruments could be repackaged as retail financial products that would allow the homeowner to hedge risks due to unpredictable fluctuations in price. Under such circumstances, the homeowner's confidence in his investment would be rational and not subject to the psychological contagion of "new era" hype. Towards the end of the book, Shiller argues that being able to secure the price of one's home against spastic variations could prevent the panic selling and "white flight" that has occurred in urban areas.
All these innovative, forward-looking ideas make The Subprime Solution an exciting work. It should be on the reading list of anyone who wishes to get a better understanding of the current crisis.
 Everyone who paid too much for a house is responsible for the bubble March 27, 2009
andris virsnieks (Seattle, WA USA)
0 out of 1 found this review helpful
The bubble cannot be explained by interest rates (takes Alan Greenspan of the hook), population growth and construction costs. The professor thinks that psychological/sociological phenomenons such as social contagion, information cascades, zeitgeist and common opinion are the cause. And the public believes in the real estate myth that the price of real estate must inevitably trend trend strongly upward through time. Professor Shiller make a case that the public's belief in real estate is not justified because inflation, income growth and "amounts" of housing consumed are not properly considered by the public. On page 70 he writes: "If one looks squarely at the issue, it is clear that the rise in value of existing urban areas has shown no tendency at all to make investors rich." This statement severely discounts thousands and thousands of get rich real estate books. There is a disconnect. It could be that the author is not considering income property (that is rents)? Something is wrong. Too many real fortunes large and small have been amassed through real estate. There are too many exceptions to the "tendency" detected by Dr. Shiller. Squarely looking at the issue, I rechecked the Internal Rates of Return (IRR) on my eight investment condominiums depicted in my book: How to Invest in Condominiums, none of them go along with the professor's tendency, all to this day continue to be highly profitable. How many exceptions must there be to a tendency to disprove it?
The various changes to the financial system proposed by the author to achieve "Financial Democracy" on the surface sounds good, but are quite technical and difficult for a non-expert to fully comprehend. The changes are significant. How would they really work when implemented? What unanticipated side-effect would there be?
Figures 2.1 US Real Home Prices and 2.2 Real Home Prices in a Sample of Cities are very revealing and instructive.
Showing reviews 1-5 of 33
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