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The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It Hardcover – August 24, 2008

38 customer reviews
ISBN-13: 978-0691139296 ISBN-10: 0691139296 Edition: First Edition

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Editorial Reviews


Robert J. Shiller, Co-Winner of the 2013 Nobel Prize in Economics

Winner of the 2009 Bronze Medal in Finance/Investment/Economics, Independent Publisher Book Awards

Honorable Mention for the 2008 PROSE Award in Business, Finance, and Management, Association of American Publishers

"One man who does have some ideas is the Yale economist Robert Shiller, who would merit attention if only for the fact that he predicting the bursting of the Internet bubble, in 2000, with his book Irrational Exuberance, then discussed at length the dangers of systematic risk in his next, The New Financial Order. Now, in The Subprime Solution--published in August, after the start of the meltdown, but before the full scale of the disaster had become manifest--he comes up with a set of startlingly counterintuitive suggestions about what to do next."--John Lanchester, The New Yorker

"With The Subprime Solution, Robert J. Shiller offers his formula to protect us from repeating such disasters: more financial engineering. It would be easy to sneer at this idea, but Mr. Shiller, an economics professor at Yale University, always deserves a hearing. . . . In what he describes as a 'brief manifesto,' Mr. Shiller argues that bailouts of distressed borrowers are inevitable to avoid wrecking our economy and shredding our social fabric--even though bailouts may punish the prudent (say, through higher taxes) while comforting those who gambled on real estate and lost."--James R. Hagerty, Wall Street Journal

"Irrational exuberance, or the 'social contagion of boom thinking,' is . . . the subject of Shiller's new book, The Subprime Solution, a slim but valuable addition to the growing literature on the ongoing collapse of the housing market."--Max Fraser, The Nation

"[The Subprime Solution is] a lucid primer on how we slipped into this money pit and what it might take to clamber out of it. . . . Shiller is sometimes called a Cassandra, and his prophesies about the dot-com and housing bubbles did come true. Yet in these pages he sounds more like a visionary optimist who considers today's emergency to be a grand opportunity."--James Pressley, Bloomberg News

"In The Subprime Solution, [Shiller] briskly sketches out his views on both short-term and long-term strategies for dealing with a housing meltdown that's left millions of Americans a lot less wealthy--and an unfortunate number at risk for losing their homes. . . . The book's most compelling discussion centers on the long-term opportunities that lie in this crisis. Shiller describes how key parts of America's financial system--the Federal Reserve, the Securities and Exchange Commission, and the FDIC, to name only three--were created in the reforms after earlier bank crises or the Great Depression. . . . Shiller suggests that political leaders should look at the current crisis as an opportunity to rethink the homebuying process and add new protections to keep homeowners from getting in over their heads during a future bubble."--Daniel McGinn, Newsweek.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. . . . [A] brilliant and radical--but not implausible--perspective on putting the Humpty Dumpty that is American finance together again."--Arvind Subramanian, Forbes.com

"Yale University's Robert Shiller is one of the world's outstanding economic thinkers and intellectual innovators, with a record of foresight that is the envy of his profession. . . . His short, snappy and surprisingly far-reaching book on the subprime crisis is as interesting and indispensible as you would expect. . . . The Subprime Solution is an ambitious little volume. . . . It covers a remarkable amount of ground in less than 200 pages. . . . . [T]he book's broad framing of the issues is novel and valuable, and its arguments are always stimulating. . . . Shiller . . . is an ardent financial-technology optimist, and his book is a torrent of fascinating ideas. Anybody interested in the subject must profit from reading it."--Clive Crook, Financial Times

"Robert J. Shiller explains how trillions of dollars of mortgage debt, based on dubious loans to doubtful borrowers, were forfeited and how it can be fixed. An influential economist, he offers insights into the growth of the credit bubble and solutions for curing the ensuing chaos. . . . 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. . . . For those who want to figure out how to fix the global credit crisis that has developed as a result of Americans' inability or unwillingness to read their mortgage contracts, The Subprime Solution is vital reading. It is advocacy built on faith that government does good, that intervention never produces unintended results and that there is no other way to fix the mortgage mess."--Andrew Allentuck, The Globe & Mail

"In his new book, The Subprime Solution, the Yale University professor sounds an alarm that the credit crunch, now early in its second year, poses a dire risk. His text is a stimulating, rapid response to current events--and a forceful demand for dramatic action from Washington, where, he says, the White House and Congress have been 'totally inadequate' to the task. . . . [A] storehouse of valuable, provocative ideas awaits the reader of The Subprime Solution."--Christopher Farrell, BusinessWeek

"In The Subprime Solution, he argues that what united the missteps by the Federal Reserve, mortgage brokers, Wall Street bankers, and home buyers that together brought on the current financial mess was a shared belief that house prices never go down. What's the antidote to that kind of mass delusion? Shiller seems to have no interest in substituting his judgment, or the government's, for the market's. Instead, he sees information and innovation as the counter to group think."--Justin Fox, Time

"Robert J. Shiller's clear-eyed look at what happened in the U.S. housing market--and what might be done about it--is not keen to attribute blame to the actors in the drama. He explains that the development of subprime mortgages in the Nineties was welcomed as a way of extending home ownership to those once locked out of the market, and it was not the dishonesty of the mortgage lenders, or the greed of bankers, that led to the bubble. There was dishonesty and greed, but these were the result of the bubble, not its cause."--Tim Worstall, The Telegraph

"American optimism: Is there any investment bubble it can't fuel? Consider the excesses of the housing market, the effects of which are roiling the global economy. As Yale University economist Robert Shiller demonstrates in his short, whip-smart new book The Subprime Solution, there was a contagion at work that helped pushed home prices to unsustainable levels. . . . Shiller's views are grounded in exhaustive research and penetrating analysis. The Subprime Solution should be read by anyone with assets at risk in the global financial crisis and a desire to fix things ahead of the next crisis. Which is to say, all of us."--Robert Elder, Austin American-Statesman

"Robert Shiller's got an argument that will make some peoples' heads explode in his new book The Subprime Solution--we need more speculation in the housing market. . . . I said above that this solution will make some peoples' heads explode, that the solution to an excess of speculation is to create a market in yet more speculation. Yet in this case ti is indeed true, this is a valid solution."--Tim Worstall, The Register

"[The Subprime Solution] is short, punchy and political. Shiller is a top-flight academic economist who has often warned of the tendency of markets towards irrational exuberance, and of the harmful consequences that follow. He is rightly scathing towards the 'boosters' who kept assuring us that house prices only rise, and he gains authority for having spoken out during the boom, when it was an unpopular position to hold. . . . Shiller's debunking of house price myths is masterful. Especially important is his rubbishing of the concept of scarcity . . . Shiller's explanations are sophisticated and intelligent, and they are also admirably clear."--Michael Savage, Fund Strategy

"The Subprime Solution, his postmortem on irrational exuberance in the real estate market, is superb, even for general-interest readers otherwise confused by the whole mess. Though his introduction reads a bit like an arid position paper, his insistence on the fundamentally psychological, rather than economic, basis of the boom is supple and fascinating."--Andrew Rosenblum, New York Observer

"If you're unfamiliar with Robert Shiller then understand that he is perhaps the most eminent and considered examiner of modern investment bubbles. . . . Shiller's new book, The Subprime Solution, is a concise attempt to elaborate in just seven short chapters the genesis of the housing bubble, explode its myths, explore its scale and the dangers of its deepening impact, assert the need to maintain confidence in our economic and financial institutions by aggressive action, and then explore longer-term, more fundamental reforms and innovations that will create a population much more attuned to economic risk.... There are many more recommendations, but if this book has the ambition of Keynes' earlier work, and the scale of the problem is as suggested, I'd argue that the book is as accessible as you are going to get from such a modern behavioural economics guru. It's a book that everyone who lives in a house should own; just don't buy ten and try to rent them out to friends."--The Knackered Hack

"In his latest work, The Subprime Solution, Shiller explains that greater financial 'democracy' and a 'contagion of ideas' led many to conclude a 'new era' had been reached in real estate. The public expected prices to rise continually. Worse, Shiller wrote: 'The very people responsible for oversight were caught up in the same high expectations for future prices.'. . . Shiller's The Subprime Solution is well worth the read for individuals and private enterprise looking to understand current real estate bubble. It should be required reading for public policy makers who need to take immediate action to solve the subprime crisis."--John Fout, TheStreet.com

"Like the financial bubble in technology stocks that exploded in 2000, real estate investors acted on unrealistic assumptions that prices could only go up. In the aftermath, Shiller's recommendation to policy makers is 'Mend It, Don't End It.' He advises regulatory modifications and greater financial disclosure from all players in the complex mortgage-banking process."--Kevin G. Hall, McClatchy Newspapers

"In [The Subprime Solution], he provides the ignoramuses on Wall Street, asleep-at-the-switch regulators and dumbfounded investors worried about their savings with a stark insight to digest over the last two weeks of summer: 'We as a society do not understand or know how to deal with speculative bubbles.'"--Robert Lenzner, Forbes.com

" [I]t's an interesting book. . . . [S]hiller convinced me . . . that bailing out banks and borrowers who've been clobbered might be the right thing to do."--Dan Pink, danpink.com

"In his now-famous 2005 book, Irrational Exuberance, Second Edition, Yale professor and economist Robert Shiller predicted a boom and bust in real estate would have terrifying global ramifications. He was mocked by realtors, but global bank failures and the bailout of Fannie Mae and Freddie Mac have proved him dead on. Now Shiller strikes again with The Subprime Solution, his suggestion for sweeping economic reform to get us out of this mess."--Katie Benner, Fortune

"While initially providing a short and concise understanding of the subprime fiasco, Shiller goes on to investigate the various financial collapses over the years and the history of recent housing arrangements, searching for clues that might inspire a universal remedy to our current predicament. . . . Along the way, the narrative, which skips along without being fussy or intrusive, also emphasises the characteristics, psychology and lifespan of the bubble--be it financial, IT or housing--and how the way we've changed the way we think 'is the deepest cause' of the current variant of the malignancy."--Paul O'Doherty, The Investor

"[Shiller] offers a primer on the history of home prices, roots of subprime lending and a road map of what to do now. The book is at its best when explaining how so few in authority imagined what has come to pass. Shiller says they were filled with same housing boom faith held by the public."--Jim Wasserman, The Sacramento Bee

"In his latest book, The Subprime Solution, he briefly but deftly dissects how easy credit, lack of government oversight and human behavior allowed the subprime bubble to inflate. Shiller's understanding of human behavior is the book's genius, both in the diagnosis and the proposed cures."--Robert Frick, Kiplinger's

"For a closer examination of the crisis, there's The Subprime Solution by Yale University economist Robert J. Shiller, the bestselling author of Irrational Exuberance. In his new book, Shiller focuses more tightly on the stock market bubble of the 1990s and the housing bubble of the last seven years, which led lenders to loosen requirements for loans and resell these questionable loans in the subprime market. He shows how the bubble, when overheated housing prices cooled and asset values fell, burst and led directly to the subprime mortgage crisis that torpedoed the credit markets and with them stock markets worldwide."--Geeta Sharma-Jensen, Milwaukee Journal-Sentinel

"In this slim volume, Shiller not only describes the problem but also places equal emphasis on various proposals to correct it. Rather than viewing the subprime meltdown and credit contraction as a handwringing crisis, he sees it as an opportunity to initiate institutional reforms that will ensure against repeat failures and extend opportunities for home ownership. . . . An important, timely book."--E.L. Whalen, Choice

"Reading Shiller also makes me optimistic. Ever the contrarian, he's convinced that, used properly, the new financial technologies that have such a bad name right now will make us all much better off in the long run. In particular, he's working on ways ordinary folk can get out from under the now standard but truly bizarre investment custom in which most of us sink most of our net worth into a single piece of real estate. What kind of sensible diversification is that? What Shiller proposes is the market-led 'democratization of finance.' Coming from anyone else you'd think it was a scam. But read his book and you'll end up feeling strangely optimistic, despite the enveloping gloom."--William Watson, Montreal Gazette

"The Subprime Solution is an easy read at less than 200 pages. People seeking to understand the cause of the housing bubble, and those wanting to consider short- and long-term solutions would be well-served reading it."--Bill Freehling, Fredricksburg Free Lance-Star

"In The Subprime Solution, which he wrote just as the system was beginning to implode, he says that what is needed now is the next stage of financial innovation, not constriction. . . .He also sees government intervention as vital to channel animal spirits and innovation. . . .In essence, Shiller is laying the intellectual groundwork for the next financial revolution."--Zachary Karabell, Newsweek

"The book is not so much an analysis of the subprime crisis as an essay that ruminates on the genesis and evolution of financial bubbles in general and housing bubbles in particular. Shiller believes correctly that economists, in their emphasis on rational decision-making, have confused desired outcomes with actual outcomes--and have paid far too little attention to the reality of swings in social sentiments that can move market prices far from sustainable levels."--Richard N. Cooper, Foreign Affairs

"This is an important book from a distinguished academic. . . . The book offers a coherent alternative to policy makers. They should consider its recommendations very seriously."--Shamik Dhar, The Business Economist

"[T]his is an exciting book that is to be read under the current market condition. It provides us some hope of correcting the existing problems, so as to have a brighter future."--Ye Xu, Journal of Property Investment & Finance

"Policymakers, and students of financial history, money and macroeconomics, will find much of value in Shiller's assessment of the subprime debacle.""--Oscar T. Brookins, Eastern Economic Journal


"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."

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Product Details

  • Hardcover: 208 pages
  • Publisher: Princeton University Press; First Edition edition (August 24, 2008)
  • Language: English
  • ISBN-10: 0691139296
  • ISBN-13: 978-0691139296
  • Product Dimensions: 8.4 x 6 x 0.8 inches
  • Shipping Weight: 8 ounces (View shipping rates and policies)
  • Average Customer Review: 3.5 out of 5 stars  See all reviews (38 customer reviews)
  • Amazon Best Sellers Rank: #476,982 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

112 of 127 people found the following review helpful By Gaetan Lion on September 11, 2008
Format: Hardcover Verified Purchase
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.
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30 of 32 people found the following review helpful By Yoda on October 1, 2008
Format: Hardcover Verified Purchase
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).
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3 of 3 people found the following review helpful By Solomon Rabinowitz on April 7, 2009
Format: Hardcover
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.
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