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

by Robert J. Shiller (Author)
Key Phrases: subprime solution, current subprime crisis, livelihood insurance, United States, The Promise of Financial Democracy, Great Depression (more...)

Editorial Reviews

Review
"His short, snappy and surprisingly far-reaching book on the subprime crisis is as interesting and indispensable as you would expect." --Clive Cook, Financial Times, September 8th, 2008

"In the aftermath, Shiller's recommendation to policy-makers is "Mend it, Don't End It." --Kevin G. Hall, The Modesto Bee, August 22nd, 2008

"Is this a wise bail-out? The best statement I have read on this question comes from Professor Robert Shiller of Yale University in his fascinating new book on the housing bubble." --Martin Wolf, Financial Times, September 9th 2008

"Robert Shiller is financial forecasting's dean of doom. But he has ideas for fixing markets too." --Justin Fox, Time Magazine, September 15th, 2008

"Robert Shiller is someone who should be taken seriously." --Andrew Leonard, Slate.com

"What sets Shiller apart--brilliantly apart--from other analysts of the housing bubble are the sharpness of his diagnoses and the creativity of his solutions. These are the core of his excellent new book, The Subprime Solution: How Today's Global Financial Crisis Happened and What to Do About It." --Arvind Subramanian, Forbes.com, September 15th 2008

"Why listen to Shiller at all? He remains a rare breed -- an academic who has transformed economic theory into useful real world solutions. As a renowned professor of economics at Yale University, he remains the expert on U.S. housing markets." --John Fout, The Street.com, August 20th, 2008

Review
"Shiller goes beneath the surface of the write-downs and the bailouts and the fines and the litigation to ask whether "the social fabric is indeed at risk and should be central to our attention as we respond to the subprime crisis."

"It is short, punchy and political. Shiller is a top-flight academic economist who has often warned of the tendency of markets towards irrational exuberance."

"Shiller's reputation in economics, his majestic prose style, his statistical proofs and his vast coterie of admirers suggest that at least some of his recommendations will become part of U.S. mortgage regulation."

See all Editorial Reviews

Product Details

• Hardcover: 208 pages
• Publisher: Princeton University Press (August 4, 2008)
• Language: English
• ISBN-10: 0691139296
• ISBN-13: 978-0691139296
• Product Dimensions: 8.5 x 5.8 x 1 inches
• Shipping Weight: 13.6 ounces (View shipping rates and policies)
• Average Customer Review: 3.3 out of 5 stars See all reviews (32 customer reviews)
• Amazon.com Sales Rank: #39,377 in Books (See Bestsellers in Books)

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Customer Reviews

Most Helpful Customer Reviews

82 of 95 people found the following review helpful:

2.0 out of 5 stars 3 for Diagnosis 1 for Solutions. Read why., September 11, 2008

By	Gaetan Lion - See all my reviews (TOP 500 REVIEWER)    (REAL NAME)

Robert Shiller's track record was impressive at first. He wrote Market volatility in 1992 outlining how stock price volatility was due to psychological speculation as it was disconnected from economic fundamentals. He was right as the stock gyrations in 1987 and 1989 demonstrated. In 2000, he wrote the excellent Irrational Exuberance stating stock prices bubbled up and were bound for a crash. Within three months the NASDAQ did exactly that loosing more than half its value taking the rest of the market on a three year brutal downturn (dot.com Bubble). At this stage, we thought Shiller was blessed with superior insight. Then, he lost his edge by envisioning retail financial insurance products to protect against risks often not worth covering as introduced in his strange The New Financial Order: Risk in the 21st Century. This book recycles many of those confused concepts.

In "The Subprime Solution" Shiller diagnoses the cause of the Subprime crisis and also develops a set of short-term and long-term solutions to fix and prevent this crisis.

His diagnosis is OK. He attributes the overarching cause of the Subprime crisis to bubble psychology. This diagnosis is a repeat of "Irrational Exuberance" focused on residential real estate instead of stock markets. He ties a lot of symptoms such as the increasingly lenient underwriting, lenient Moody's MBS ratings, and investors appetite for MBS to bubble psychology. He thinks bankers, MBS investors, Moody's, hedge funds, homeowners, and condo flippers all thought they could throw caution to the wind since the value of the underlying collateral (home) would shore up all boats.

When Shiller comes up with recommendations he is not convincing. In the short-term he simply suggests we bail out everybody by reviving the Home Owners' Loan Corporation (HOLC) first established in 1933 but no longer in existence. The former HOLC accepted mortgages as collateral for loans to mortgage lenders so long as the mortgages had more lenient terms than the market. This recommendation has several flaws to it. First, it runs into moral hazard. It would bail out with taxpayer's money homeowners who never had the financial resources to buy a house and condo flippers who speculated with other people's money. Second, a good deal of those mortgages has been securitized into complex collaterized bond structures with many tranches sold to international investors. Those mortgages administered by bond trusts are not pledgeable to an HOLC organization.

Shiller's long term recommendations are ineffective. Here he repeats many of the retail insurance products he envisioned in "The New Financial Order." His first recommendation is nationwide government subsidized retail financial advice. Yet, all the financial advice prospective homeowners need is to ask themselves if they can afford the mortgage. If the borrower is not numerate, the creditor should operate in a regulatory environment to be forced to make a prudent decision on his behalf. Shiller recommends the adoption of a new economic currency that would be adjusted for inflation. He feels this would improve price information of homes. In a country with very moderate historical inflation such an economic unit adds much confusion without merit. Shiller also thinks that his creation (with the Chicago Board of Trade) of home price index futures will eliminate bubbles because international investors will short (sell futures) on cities whose home prices appear to have bubbled. But, such futures markets have not eliminated bubbles in stock and commodity prices. Why would they eliminate bubbles in residential real estate? Additionally, those home price index future markets have been in existence for already two years. And, they don't seem to get off the ground. Trading volume is not sufficient to provide valuable price information. Other strange recommendations include his "continuous-workout mortgage" whose term would be adjusted downward to reflect the current income of the specific occupation of the borrower. This entails a huge transfer of risk to the creditors which would result in much higher mortgage rates. Another recommendation is home equity insurance for the borrower. But, it is not the borrower that bears the risk on the collateral value, it is the creditor. This insurance would be of little value to the borrower. Another recommendation is livelihood insurance insuring one's income from the risk of one's specific occupation. This product is not readily feasible. It also understates how transferable many professional skills are and how liquid are labor markets are. In summary, his long term recommendations do not address the Subprime crisis.

I recommend a far better book on the subject: Charles R. Morris The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash. Also, Shiller feels cities are commodities with urban amenities easily replicable. For an excellent book that explains why this is not so, I recommend Richard Florida's Who's Your City?: How the Creative Economy Is Making Where to Live the Most Important Decision of Your Life

20 of 22 people found the following review helpful:

3.0 out of 5 stars Three stars for the layman but only one for those with academic/professional backgrounds in the subject, October 1, 2008

By	Yoda (Hadera, Israel) - See all my reviews

In terms of the value, this book would rate three stars for the layman but only 1 for those knowledgeable in the field.

During the first approximately 100 pages of this 180 page book, Schiller describes what lead to this debacle and draws analogies between the current situation and past in both the U.S. (i.e., events leading to the Depression, the Savings and Loan crisis leading to the formation of the Resolution Trust Company, etc.) and overseas (i.e., the 1990s bubble bursting in Japan and the Swedish banking sector crises of the 20 years ago). What he describes should be well known by anyone who has had an undergraduate course in U.S. Economic history, reads a sophisticated financial newspaper or magazine (i.e., Financial Times or Economist) and/or is a financial professional. Hence for this group the first 100 pages would have very little value. For layman without this background, however, this knowledge would provide good perspective.

Where the book really is weak, though, is the remaining 80 pages where Schiller provides his "solution(s)". This is what he calls the "democratization" of the financial market. The important points of this consist of:

a) The provision of financial advice to "the masses" through subsidized professional financial advice.

b) Adding more "bite" to government regulatory bodies (i.e., SEC).

c) the creation and utilization of financial instruments that provide insurance against fluctuations in home prices, economic conditions and peraonal economic conditions (i.e., unemployment). Examples of such financial instruments provided by Schiller include options and futures indexed to housing prices, Government debt instruments that are counter cyclical and instruments that provide the ability to hedge against personal financial circumstances.

Each of the above need to be examined in detail. With respect to the first, it seems highly unlikely that high quality professional financial advisement services that are unbiased (i.e., don't provide advise geared to selling financial products that do not necessarily coorespond to individuals' econommic situations as opposed to the commissions of the financial advisors) can be provided at a cost effective price that even the lower income ranks can afford. Any such labor intensive service can only be provided (in general), cost effectively, by those with limited educations and/or poorly trained backgrounds. A good analogy would be going to H&R Block. You pay relatively little there but you end up with high school graduates who, in general, have very limited qualifications. The end result would be mediocre advise. In a recent article in the New York Times the IRS was quoted as stating that 2/3 of tax forms prepared by tax preperation firms had contained errors. If these firms cannot succeed in providing relatively simple tax assistance how can they provide more complicated financial advise on how to hedge home, retirement and other assets? Even if they were all highly qualified this would still be a problem. The events leading to the current bubble bursting, as well as those of the late 1990s, caught many highly educated professionals such as Alan Greenspan and Bernanke by surprise. If they failed how can the less qualified be expected to perform better? This simply does not seem logical.

With respect to Schiller's recommendation to beef up government regulatory agencies such as the SEC, this would seem the most feasible of all. SEC funding can be increased, penalties increased, and litigation can be loosened to permit an increased deterance of corporate mafleasance by accounting, investment banks and other financial institutions. This recommendation is very realistic.

Schiller's third recommendation, the utilization of financial instruments to mitigate against fluctuations in housing prices and individual economic circumstances, sounds very nice theoretically but is hard to achieve in reality. With respect to housing price fluctuations, options futures on housing prices can be used (they already exist) but they require extensive knowledge in finance and they are relatively expensive to purchase when housing prices are on the decline (when they are needed most). Hence not a solution that seems very practical beyond homebuidling conglomerates. But even they did not make very extensive use of them.

With respect to financial instruments that can be used to mitigate against individuals' economic fluctuations (i.e., unemployment) there are other problems. First they do not exist. Secondly, even if they did (and why they are not provided by the private sector to begin with), there would be to much of a problem relating to moral hazard. Individuals can purchase such insurance then either intentionally put themselves out of work or not do enough to prevent unemployment. If one has insurance against all (or nearly all) income losses stemming from unemployment the incentive would greatly decrease to take steps to prevent unemployment.

In short, only Schiller's recomendation to beef up regulatory agencies seem realistic and feasible (at least in the foreseable future).

16 of 20 people found the following review helpful:

5.0 out of 5 stars Thoughtful, straightforward diagnosis and prescription, September 18, 2008

By	Rolf Dobelli "getAbstract.com" (Switzerland) - See all my reviews (TOP 50 REVIEWER)    (REAL NAME)

Robert Shiller, the prescient author of the book Irrational Exuberance, offers an insightful examination of the causes of the subprime mortgage crisis, and suggests a list of potential measures for the future. He lays the blame for the subprime crisis on the same oblivious fiscal attitudes that led to the technology bubble of the 1990s and the real estate bubble of the 2000s. Both bubbles involved excessive lending and resulted in severe losses for capital providers. His prescription for dealing with the crisis involves a range of policy measures. In the short term, he calls for bailouts for low-income borrowers who got drawn into subprime scams that they did not understand. For the long term, he proposes a new framework for financial institutions, more transparent information, simpler contracts, improved risk-management markets, equity insurance and home loans linked to income, among other measures. Both his diagnosis and his prescription will be controversial, no doubt, but getAbstract thinks his book is a necessary text for anyone who wants to understand what's happened, and how to survive it and learn from it.