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

by Robert J. Shiller


In this trenchant book, best-selling economist Robert Shiller reveals the origins of this crisis and puts forward bold .

a lucid primer on how we slipped into this money pit and what it might take to. .

a lucid primer on how we slipped into this money pit and what it might take to clamber out of i.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.

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.

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. 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.

How wonderful it is that nobody need wait a single moment before starting to improve the world. In the longer term, the subprime solution will require leaders to revamp the financial framework. The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It. 137 Pages·2008·385 KB·2 Downloads·New!. How to Get Started Day Trading Futures, Options, and Indicies. 95 MB·16,561 Downloads·New!

Shiller blames the subprime crisis on the irrational exuberance that drove the economy's two most recent bubbles . 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 in The Subprime Solution.

Shiller, Robert J. Publication date. Books for People with Print Disabilities. Subprime mortgage loans, Secondary mortgage market, Real estate investment, Global Financial Crisis, 2008-2009. Princeton, N. J. : Princeton University Press. inlibrary; printdisabled; ; china. Internet Archive Books.

What hazard does its bursting pose to the solvency of financial institutions? .

book by Robert J. Shiller. 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.

Shiller explains how the subprime mortgage crisis occurred and he also puts forward solutions to solve it, for instance, he believes that a restructuration of the institutional foundations of the financial system is necessary.

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.

Zut
Karl Marx, who burned many a late-night candle in the study of historical dynamics, once said "'Hegel remarks somewhere that all great world-historic facts and personages appear twice. He forgot to add: The first time as tragedy, the second time as farce." That may have been true a couple of centuries ago, but a more current assessment might be "No matter how much you have learned from history, and however well you have corrected your historical faults, there are plenty more new, and equally treacherous, mistakes to be made in the future." The current financial crisis seems to bear this out.

Keynesian aggregate demand management appeared to have died in the stagflation of the 1980's, not because its "rational expectations" critics had a better theory (I think rational expectations theory is just a sick joke), but because of the basic correctness of Milton Friedman's insight that legislative counter-cyclical policy is just too slow to deal with the business cycle. Now, it appears we are all Keynesians (indeed, Republicans have been especially Keynesian in the years since Reagan's historic climb to power), and government is moving at virtually lightning speed to prevent the normal operation of the business cycle. Richard Nixon was wrong when he said, "We are all Keynesians now," but now, almost forty years later, it appears to be true. Who would ever have expected this turn of events?

Where are the infamous "rational expectations" theorists now? Doubtless they are holed up somewhere with the Nobel prizes and endowed chairs, laughing all the way to the bank.

I think we can confidently say is that if people learn from history, it is only the past ten years or so of history. I was personally blown away when I read Alan Greenspan, who had presided over the Federal Reserve for some nineteen years, admitted to Congress last October that "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity -- myself especially---are in a state of shocked disbelief." I hope Greenspan is simply lying, but I have a deep fear that he is telling the truth.

Some people did foresee the subprime mortgage crisis and predicted an ensuing financial meltdown, among them Edward Gramlich (Subprime Mortgages: America's Latest Boom and Bust, Urban Institute Press, 2007) and Robert Shiller, who coined the phrase "irrational exuberance"---adopted by Greenspan to dampen a recent stock market run-up. This book is a bit of "I told you so," as Shiller makes it clear at every turn that he predicted this a long time ago, so he must be listened to now in attempting to find a solution. The logic isn't there, but Shiller's suggestions are useful and interesting.

Shiller believes the subprime crisis is a case of a financial panic, or "bubble," of a sort that has recurred periodically since the dawn to international financial markets (Charles Kindleberger, "Manias, Panics and Crashes," 2000). In the current case, housing prices began a steady increase in about 1999, and by 2004 or so, supposedly intelligent people began to think that housing prices had an inexorable tendency to increase at what we would not consider to be a virtually astronomical rate.

Therefore, lending institutions dropped their lending requirements for new mortgages, on the grounds that in a couple of years or so increasing property values would ensure the integrity of the financial asset whether or not the current mortgagee was delinquent. From this point on, in a world-wide financial sector most of whose members, like Greenspan, could not conceive of basic market failures, the melt-down was quite inevitable.

There are many things I do not understand about the current crisis, the most critical being why so few financial analysts sounded the warning, and why it was not heeded by level-headed guys in policy positions. I certainly saw it coming, and sold two primary residences in 2006 (on behalf of family members whose finances I managed) at the top of the market. I would have sold them two years earlier if I could have convinced their owners of the madness of holding on to these bubble assets.

Shiller's recommendations are well-meaning and worthy of support. His concept of "democratization of finance," so that financial institutions work for all of us, not just the very rich, is brilliant and fecund. If Shiller had his way, people would be as knowledgeable in financial affairs as they are in politics, health care, and other areas in which informed voters and consumers can really make a difference. Each and every one of Shiller's suggestions is worthy of support. First, he says, the financial information infrastructure should be extended to all citizens, much as health care information is (at least ideally) today. Second, financial instruments should be created to deal with the major risk factors faced by the non-wealthy (e.g., variations in house value, price and wage levels). Third, there should be a "default" set of basic financial contracts that non-knowledgeable consumers can use to deal with their most important investments, including home ownership and retirement.

In fact, we still do not really understand the causes of the current financial crisis, and we may not for many years. Economists are still debating the causes of the Great Depression, some seventy-five years later (although there is more agreement now than in previous decades). Certainly, more regulation of financial innovation is needed, but in fact, whatever SEC regulations are created, in the next great upsurge of economic activity there will be more financial innovation that slips under the regulatory radar, smart people will make a lot of money and get out while the getting is good, and industry leaders will act as though the new bubble will last forever, or at least for another year (every year). Some new Greenspan-clone will be frankly "shocked" that markets don't work perfectly, and history will repeat itself, not in Hegel's or Marx's sense, but in a perennial tragicomedy that characterizes financial dynamics.

Shiller is very supportive of "behavioral finance" in this book, recognizing that people do not have completely objective theories of how financial markets operate, or even of probability theory basics. He is wrong, however, if he thinks that a strong "financial information infrastructure" will change this. People with crazy theories of probability and risk cannot be taught otherwise---I know because I have tried. I have tried to tell day-traders that they are enriching only their brokers, and they will be out of business in nine months (the median life of a day trader, I am told). I have tried to convince testosterone-endowed relatives that, whatever happens in James Bond movies, luck is not with the sly, the muscular, or the devout. All to no avail.

Some will say that we should suppress the whole dynamic that gives rise to financial innovation and bubbles. We should always lend a critical and attentive ear to such proposals, but we must always recognize that the vitality of our economic system depends on financial innovation, and we should always appreciate those people who ignore history and stick their necks out to make new history. They go where angels (and "progressive" political critics) fear to tread, and we are the better for it.
Vetalol
I am an admitted follower of the work of economist Dr. Robert J. Shiller.

His partial bio reads like this (From Yale University): "Robert J. Shiller is the Arthur M. Okun Professor of Economics, Department of Economics and Cowles Foundation for Research in Economics, Yale University, and Professor of Finance and Fellow at the International Center for Finance, Yale School of Management. He received his B.A. from the University of Michigan in 1967 and his Ph.D. in economics from the Massachusetts Institute of Technology in 1972. He has written on financial markets, financial innovation, behavioral economics, macroeconomics, real estate, statistical methods, and on public attitudes, opinions, and moral judgments regarding markets"

Shiller, Robert J. The Subprime Solution - How Today's Global Financial Crisis Happened and What to Do About It, Princeton University Press, Princeton, New Jersey Copyright © 2008 by Robert J. Shiller

I finally got around to reading Subprime Solutions - How Today's Financial Crisis Happened and What to do about it. (Princeton University Press, Princeton, New Jersey USA Copyright (c) 2008 by Robert J. Shiller

Admittedly, Shiller's other recent books entitled Irrational Exuberance (2005) and Animal Spirits (with George Akerlof - 2009) are terribly tough acts to be compared against. My review of Animal Spirits is here. I am devouring Irrational Exuberance at the moment.

I enjoyed this book yet, found many of the proposed solutions (continual workout mortgage, equity insurance for homeowners etc.) lacking in their application to the new dimensions of the U.S. homeowner crisis that now exist, in 2010.

Yet, Shiller always has insights that I find appetizing. I always learn from his work. Clearly he remains both a central and highly regarded advocate for the "unfinished business" that U.S. policy makers must embrace to thwart the ongoing loss of home ownership by the American middle-class and establish safeguards to this will not happen again.

Here are some excerpts from Subprime solutions that I really appreciated. I'll let Shiller's words speak for themselves:

"More importantly, this crisis has set in motion fundamental societal changes-changes that affect our consumer habits, our values, our relatedness to each other. From now on we will all be conducting our lives and doing business with each other a little bit differently." P.1.

"Allowing these destructive changes to proceed un impeded could cause damage not only to the economy but to the social fabric - the trust and optimism people feel for each other and for their shared institutions and ways of life - for decades to come." P.2

"Today the typical household has as its principal investment its home. A home represents a highly leveraged exposure to a single, stationary plot of real estate-about the riskiest asset one can imagine. The standard mortgage provides no protection against difficulties in repaying the lender due to changes in the marketplace. But mortgages can and should be designed to compensate for these changes by including provisions to ensure homeowners against their major risk." P. 22.

"strengthen the social fabric, and create the conditions for greater economic stability and growth." P. 22

"Real home prices for the United States as a whole increased 85% between 1997 and the peak in 2006." p 32

"The most important single element to be reckoned with in understanding this or any other speculative boom is the social contagion of boom thinking, mediated by the common observation of rapidly rising prices. This social contagion lends increasing credibility to stories - I call them "new era" stories-that appear to justify the belief that the boom will continue." P. 41.

"He (Greenspan) does not seem to respect research approaches from the fields of psychology or sociology." P.43

"What seems to be absent from the thinking of many economists and economic commentators is an understanding that contagion of ideas is consistently a factor in human affairs." P.43

"The losers are disproportionately those people who have prudently been staying out of the housing market bubble." Pp.92-93.

Religion and response to the Depression - "Even religious thinking returned to more traditional forms. The public amusement at religious foibles so evident at the time of the 1925 Scopes trial, when the Bible was put on trial versus the theory of evolution, was fading, and being replaced by a desire to find in religion some comforting interpretation of life." pp. 96-97

"We must always be concerned about public perceptions of fairness and evenhanded treatment, about public confidence that our economic system is moving forward to provide opportunities for all. That confidence is being seriously eroded in today's subprime crisis." P.100.

"The loss of trust and belief in the economic system can have consequences not only for the economy itself, but for the social fabric as a whole, leading us all to suffer needlessly. P. 101

"The balance sheet problems into which people fall if their homes lose value are purely financial losses. But they can be converted into substantial real losses to the economy if they are allowed to destroy public confidence." P.105 -

"There is an inherent unfairness in our economy, evidenced by its sharp income inequalities." P.106

"We have to be willing to spend money on securing economic justice. That means allocating resources to determining-to the extent that this is possible-who among mortgage borrowers were misled and mistreated, and then focusing the bailouts on them." P. 112

"In a similar vein, the human sciences- psychology, sociology, anthropology, and neurobiology-are increasing our understanding of the mind by leaps and bounds, and this knowledge is now being applied to finance and economics. We have a much better grasp of how and why people make economic errors, and of how we can restructure institutions to help avoid these errors. Pp. 118-119

"Denying the importance of psychology and other social sciences for financial theory would be analogous to physicists denying the importance of friction in the application of Newtonian mechanics." P. 119

"A new kind of home mortgage that I call a continuous-workout mortgage would have terms that are adjusted continuously (in practice probably monthly) in response to evidence about changing ability to pay and changing conditions in the housing market." P. 157

"Decreases in home values can reduce or even eliminate a homeowner's equity, making it difficult or impossible for the owner to refinance with a new mortgage. The homeowner may conclude that it is impossible to move to another home, even if such a move would allow her to take advantage of a lucrative job offer. The mortgage .I' may eventually end in default, especially since the homeowner may decide that it is just not worth struggling to make further payments on a mortgage when she can just walk away from the whole mess." P. 161

"Louis Uchitelle, in his 2007 book The Disposable American: Layoffs and Their Consequences, discovered that those on whom this misfortune falls are truly suffering -but suffering mostly in silence, out of a sense of shame and of being at fault." P. 164

"Risk-avoidance behavior also has an impact on the behavior of city, regional, and even national governments. Fearing the uncertainties associated with new economic development initiatives, these governments typically choose to play it safe and model themselves along conventional lines. They slavishly imitate other successful entities when they ought to be cultivating their locales as vital centers for specific emerging technologies or industries." P. 168 -

"The key to long - term economic success is rightly placed confidence in markets. In contrast, bubbles are the result of misplaced confidence." P. 171.

A great read written to be consumed by a broad audience. I recommend it.
The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It ebook
Author:
Robert J. Shiller
Category:
Social Sciences
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EPUB size:
1225 kb
FB2 size:
1625 kb
DJVU size:
1214 kb
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Publisher:
Princeton University Press; First Edition edition (August 24, 2008)
Pages:
208 pages
Rating:
4.9
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