The Subprime Solution: How Today’s Global Financial Crisis Happened and What to Do About it by Robert J Shiller
Princeton University Press, £9.95
ROBERT SHILLER’S book is an analysis of the origins of the current international financial crisis coupled with a programme of reforms to tackle the problem and ensure that it does not happen again. He takes a deep look at the events that triggered the crisis, namely the sudden collapse in the sub-prime mortgage market in the United States, a system of loans targeted at borrowers who would not otherwise be able to gain access to credit for the purposes of purchasing property.
As an authority on previous financial crashes, Shiller brings considerable knowledge and insight to this analysis. He demonstrates the chain of events by which a toxic cocktail of overly aggressive mortgage lenders, compliant appraisers and vulnerable borrowers combined to cause the largest financial crisis to hit the world since the Wall Street Crash of 1929.
A key element is the importance he gives to the role of “bubble thinking” and “cascades” and information flows during such crises. Drawing on the latest thinking in behavioural economics, he highlights these neglected psychological aspects of economic and financial events, and it makes for very interesting reading.
However, the excessive prominence Shiller gives to these factors means that other equally important causes of the crisis are overlooked. He greatly underplays the role of the growing dishonesty among mortgage lenders; the increasing greed among securitizers, hedge funds and rating agencies; and mistakes made by the former Federal Reserve chairman Alan Greenspan.
This shortcoming, in turn, affects the programme of reform he puts forward for tackling the crisis. Quite rightly, he calls for bailouts to be directed at the less well-off as much as the big banks, and he does so on moral grounds. But the central thrust of his proposals is the extension and intensification of market forces into the area of personal finance at a time when the fundamental flaws of the free operation of the market have been made brutally apparent for all to see.
The current crisis has dealt a severe blow to the notion of the superiority of the market as a means of organising every aspect of our lives. A fundamental realignment of the balance between the financial markets and the rest of society is urgently needed. Yet Shiller’s key suggestions fly in the face of the clear evidence provided by this crisis as to the limitations of free market capitalism.
Shiller’s book may provide some valuable pointers on how to respond to the current crisis and how long term reform might be taken forward. But, overall, considering the sheer scale of the problem, his analysis can be viewed as falling considerably short of the deeper critique and the really radical programme of reform that are urgently needed by an international financial system that has been found fundamentally wanting.
Jawade Liaqat
