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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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The Subprime Solution
The Subprime Solution How Today’s Global Financial Crisis Happened, and What to Do about It Robert J. Shiller Princeton University Press PRINCETON AND OXFORD
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The author is the Arthur M. Okun Professor of Economics, Cowles Foundation for Research in Economics, and professor of finance at the International Center for Finance, Yale University; research associate at the National Bureau of Economic Research; and co-founder and principal of two U.S. firms that are in the business of issuing securities: MacroMarkets LLC and Macro Financial LLC. The views expressed herein are solely those of the author and do not necessarily reflect the views of these institutions. Copyright © 2008 by Robert J. Shiller
Requests for permission to reproduce material from this work should be sent to Permissions, Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire OX20 1TW
All Rights Reserved
Library of Congress Cataloging-in-Publication Data Shiller, Robert J.
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The subprime solution : how today's global financial crisis happened, and what to do about it / Robert J. Shiller.
p.
cm.
Includes index. ISBN 978-0-691-13929-6 (hbk. : alk. paper) 1. Mortgage loans. 2. Secondary mortgage market. 3. Real estate investment. 4. Financial crises. I. Title.
HG2040.15.S45
2008
332.7´22—dc22
2008013734
British Library Cataloging-in-Publication Data is available
This book has been composed in Minion
Printed on acid-free paper. ∞
press.princeton.edu Printed in the United States of America
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A general bonfire is so great a necessity that unless we can make of it an orderly and good-tempered affair in which no serious injustice is done to anyone, it will, when it comes at last, grow into a conflagration that may destroy much else as well. John Maynard Keyne