'The Subprime Solution' by Robert Shiller - Book Review

The Subprime Solution: How Today's Financial Crisis Happened, and What to Do About It by Robert Shiller is billed as an intelligent and original diagnosis of the root of today's economics problems. It is also hailed as visionary in its solutions for the current crisis. Sadly the book is surprisingly uninsightful, poorly edited, and extremely vague in its policy prescriptions. Subprime Solution was rushed to press and sadly it shows.

Shiller understood and called the top to the 2000 stock market bubble and the recent housing bubble. He is behind the Case-Shiller home price index. He thus has credibility on housing and bubbles.

Unfortunately Shiller fails to give an original or even a very detailed account of the origins of the current fiscal crisis. He describes commonly accepted causes of the present situation such as the growth of a bubble mentality, new types of loans, and dishonest mortgage brokers. He mentions in passing, if at all, other causes such as easy monetary policy, securitization of loans, and various government actions.

Shiller's short-term solutions amount to merely a suggestion that we somehow muddle through with some bailouts while trying to minimize moral hazard. His long-term solutions are concrete, but not reassuring. They include massive new spending on financial education and advice for all, new financial regulatory agencies with sweeping responsibilities, vast new databases of personal information to be used by the government and corporations, and even "a new system of economic units of measurement" to partially replace the dollar. His suggestions on new methods of financial engineering to diffuse and reduce risk have some merit, but given the role of financial engineering in the current debacle, increasing the use of sophisticated financial tools seems an unlikely solution.

Professor Shiller, we expect better from you than half-baked ideas from late night college bull sessions.