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The Subprime Solution
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The Subprime Solution

How Today's Global Financial Crisis Happened, and What to Do about It

Robert J. Shiller
Princeton UP, 2008
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9

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  • Innovative

Recommendation

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.

Summary

How Did the U.S. Get into This Mess?

The United States’ decade-long real-estate bubble brought about the subprime mortgage crisis that began in 2006. The bubble’s severe consequences will go far beyond the intense financial wreckage it caused. Its ripple effects constricted credit globally and led to the failure of several major financial institutions. The impact is so drastic that a return to normalcy may take years, even decades. Expect a prolonged period of slow economic growth. For a suggestion of what may be coming in the wake of the subprime crisis, look at the “lost decade” in Mexico after the 1980s oil bubble, and the 1990s stagnation in Japan after its 1980s equity and real-estate bubbles.

However, the damage this crisis has done to the social fabric is even more severe than the damage to the financial system. The subprime crisis has much in common with the reparations crisis in Germany after the Treaty of Versailles ended World War I. John Maynard Keynes quit as a member of the British delegation to signal his strong opposition to the impossible burden the treaty placed on Germany. Keynes wrote The Economic Consequences of the Peace to explain

About the Author

Robert J. Shiller is the best-selling author of Irrational Exuberance and The New Financial Order. He is the Arthur M. Okun Professor of Economics at Yale University. He is the winner of the getAbstract International Book Award 2003.

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