"Irrational Exuberance" Author
Explains Real Estate Crisis
and How to Avoid Another
 New Haven, Conn. — If the current real
estate crisis is to be resolved and a recurrence prevented, there need to be major changes
both in the marketplace and in the behavior of individual investors, explains Yale
economist Robert J. Shiller in his new book, The Subprime Solution: How Today’s
Global Financial Crisis Happened, and What to Do about It.
In this work, aimed at a general audience, Shiller explores the subprime mortgage crisis
from its development in the early 2000s to the threat it now poses to financial markets
around the world. He cites both economic and social factors as contributory causes of the
crisis, and offers a list of possible solutions to the problem.
In his best-selling book, Irrational Exuberance (2000), Shiller, the Arthur
M. Okun Professor of Economics, examined speculative bubbles in the stock and housing
markets. Now expanding on that analysis, The Subprime Solution demonstrates how the
recent economic boom and increased speculative thinking in the United States real estate
market led to an epidemic of risky investing and false security. This, in turn, helped to
bring about the current economic downturn, says Shiller. Understanding the reason for the
decline, he argues, might be the key to restoring and maintaining market stability.
"It is time to recognize what has been happening and to take fundamental steps to
restructure the institutional foundations of the housing and financial economy,"
declares Shiller, who advocates an aggressive response to the current dilemma. The short-
and long-range plans he recommends are aimed to end the present financial crisis quickly
while also preventing another one from occurring.
Shiller draws a connection between social behavior and financial decision-making, and
underlines their mutual influence over each other. Accordingly, he places as much
responsibility for the subprime situation on human behavior as on market forces. "It
is the change in thinking about ourselves that is the deepest cause of the bubble and may
be the slowest to unravel," contends Shiller.
The Yale economist’s proposals for overcoming the current crisis range from
government-funded bailouts for the least advantaged members of society to the creation of
more planned urban centers to the establishment of a new organization modeled after the
New Deal-era Home Owners Loan Corporation (HOLC). All of these proposals, Shiller asserts,
would help restore what he terms "rightly placed" confidence in the market.
Shiller also argues for the creation of a new information infrastructure to teach people
how the market operates while encouraging them to borrow, save and spend responsibly. Such
a program could be the key to preventing new crises, he reasons. Other proposals he puts
forth include a new system of economic units of measurements to ensure standardization
across the market, the establishment of a new liquid market for real estate, and home
equity- and livelihood-insurance.
Robert J. Shiller is a member of the Cowles Foundation for Research in Economics at Yale
and professor of finance at the International Center for Finance at the Yale School of
Management. He specializes in the fields of macroeconomics and finance, behavioral
economics and real estate.
The Subprime Solution: How Today’s Global Financial Crisis Happened, and What
to Do about It has been released by Princeton University Press. |
