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

137 Pages·2008·1.02 MB·english

by  Robert J. Shiller

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

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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 Keynes, The Economic Consequences of the Peace, 1919
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Contents
1 Introduction 1
2 Housing in History 000
3 Bubble Trouble 000
4 The Real Estate Myth 000
5 A Bailout by Any Other Name 000
6 The Promise of Financial Democracy 000
7 Epilogue 000
Index
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The Subprime Solution
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Introduction
1
The subprime crisis is the name for what a historic turning point in our economy and our
culture. It is, at its core, the result of the deflating of a speculative bubble in the housing
market that began in the United States in 2006 and has now cascaded across many other
countries in the form of financial failures and a global credit crunch. The forces
unleashed by the subprime crisis will probably run rampant for years, threatening more
and more collateral damage. The disruption in our credit markets is already of historic
proportions and will have important economic impacts. 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.
Allowing these destructive changes to proceed unimpeded 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. The
social fabric itself is so hard to measure that it is easily overlooked in favor of smaller,
more discrete, elements and details. But the social fabric is indeed at risk and should be
central to our attention as we respond to the subprime crisis.
History proves the importance of economic policies for preserving the social
fabric. Europe after World War I was seriously damaged by one peculiar economic
arrangement: the Treaty of Versailles. The treaty, which ended the war, imposed on
Germany punitive reparations far beyond its ability to pay. John Maynard Keynes
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