Robert Shiller, the renowned Yale economist and best-selling author of 'Irrational Exuberance', has a knack for predicting bubbles. In that book, he foretold the crash of the internet bubble in 2001 and then, in 'Irrational Exuberance, Second Edition', the sage of New Haven effectively predicted the current real estate crash, and the resulting subprime crisis.
In The Subprime Solution: How Today's Global Financial Crisis Happened, and What To Do About It, Shiller reveals the origins of this crisis that has already wreaked havoc on the lives of millions of people, and which now threatens to derail the US economy, and economies around the world. Shiller 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 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 - 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, Shiller argues, bailouts are needed in the short run. But he insists that these bailouts 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.
The Subprime Solution by Robert J. Shiller will be published on 1st September, 2008 by Princeton University Press.
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