The Subprime Solution

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

Robert J. Shiller With a new preface by the author
Copyright Date: 2008
Pages: 208
https://www.jstor.org/stable/j.cttq94jd
  • Cite this Item
  • Book Info
    The Subprime Solution
    Book 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. In a new preface to this powerful book, Shiller discusses the development of the crisis in relation to the ideas presented inThe Subprime Solution.

    eISBN: 978-1-4008-4499-9
    Subjects: Economics, Finance

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Preface to the Paperback Edition
    (pp. ix-xxiv)
  4. Acknowledgments
    (pp. xxv-xxviii)
  5. 1 Introduction
    (pp. 1-28)

    Thesubprime crisisis the name for what is a historic turning point in our economy and our culture. It is, at its core, the result of a speculative bubble in the housing market that began to burst in the United States in 2006 and has now caused ruptures across many other countries in the form of financial failures and a global credit crunch. The forces unleashed by the subprime crisis will probably run rampant for years, threatening more and more collateral damage. The disruption in our credit markets is already of historic proportions and will have important economic impacts....

  6. 2 Housing in History
    (pp. 29-38)

    The housing bubble was a major cause, if notthecause, of the subprime crisis and of the broader economic crisis we now face. The perception that real estate prices could only go up, year after year, established an atmosphere that invited lenders and financial institutions to loosen their standards and risk default. Now the defaults are happening, massively and contagiously.

    As of this writing, according to the Standard & Poor’s / Case-Shiller Home Price Indices, which I helped create, U.S. home prices have already fallen nearly half-way back down to their pre-bubble levels. The rate of fall of prices...

  7. 3 Bubble Trouble
    (pp. 39-68)

    Let us look again at Figure 2.1, which shows home prices since 1890. What in the world has been happening since the late 1990s to propel home prices up so dramatically?

    The figure shows that there were no fundamental changes in construction costs, population, or long-term interest rates at the time of the boom. So whatwasthe cause?

    Whatever it was, it was not seen by national leaders, especially not in the United States, where pride in the superiority of our capitalist system sometimes seems to approach religious fervor. During this housing boom, most of our authorities simply denied...

  8. 4 The Real Estate Myth
    (pp. 69-86)

    The recent bubble has greatly encouraged public belief in a long-standing myth—the myth that, because of population growth and economic growth, and with limited land resources available, the price of real estate must in-evitably trend strongly upward through time.

    Since the late 1990s people have increasingly come to believe in our existing cities—in their uniqueness, in their special status. As we saw in Chapter 3, the strength of this belief seems to be associated more with the idea that the increasingly capitalist world is growing rapidly richer than with the observation that simple population growth is at work...

  9. 5 A Bailout by Any Other Name
    (pp. 87-114)

    Virtually all the solutions to the subprime crisis already tried or already proposed in the United States have aspects of a bailout to them. This is true of the interest rate cuts by the Fed; the Fed’s lending to troubled institutions under the auspices of the TAF, the TSLF, and the PDCF; the tax rebate checks mailed out to individuals; the extension of loan limits by the FHA; and the extension of mortgage ceilings by the government-sponsored enterprises Fannie Mae and Freddie Mac.

    Let us be clear about what the wordbailoutmeans. Actually the term has only recently acquired...

  10. 6 The Promise of Financial Democracy
    (pp. 115-170)

    The key to the subprime solution, to preventing future crises like the current one, as well as mitigating its aftereffects, is democratizing finance—extending the application of sound financial principles to a larger and larger segment of society, and using all the modern technology at our disposal to achieve that goal.

    Doing this will reduce the long-run incidence of speculative bubbles like the housing bubble that we have just experienced. And to the extent that such bubbles still occur, it will establish a rational context for responding to them, instead of the after-the-fact scurrying for quick fixes that we have...

  11. Epilogue
    (pp. 171-178)

    The key to long-term economic success is rightly placed confidence in markets. In contrast, bubbles are the result of misplaced confidence.

    The various components of the subprime solution described in this book are designed to facilitate such rightly placed confidence, by making the markets and their associated risk-management institutions work as they ideally can, for the benefit of all of us.

    The short-term component of the solution described here is the most urgent. People are suffering and businesses are collapsing. The memories of these traumas will harm confidence and trust in our markets for years to come, just as they...

  12. Index
    (pp. 179-196)