Robert J. Shiller's "The Subprime Solution"

I was surprisingly happy with this book. I feared a labourious read with academic gobblygook. But this book was very readable. Here's the main point hammered home by Shiller:

We are at risk that reaction to the current economic crisis could set up far back, economically as well as socially. We must act now to prevent even the possibility that a severe crisis could endanger our comity. Just as less-developed countries need to prevent the global food crisis from endangering the least fortunate people there, so too must advanced countries live up to their duties to protect their own least fortunate. The loss of trust and belief in the economic system can have consequences not only for the economy itself, but for the social fabric as a whole, leading us all to suffer needlessly.

The immediate fix that is needed is similar to that called for by the Great Depression. In the words of Henry R. Steagall, chairman of the House Banking and Currency Committee, in 1932. "Of course, it involves a departure from established policies and ideals, but we cannot stand by when a house is on fire to engage in lengthy debates over the methods to be employed in extinguishing the fire. In such a situation we instinctively seize upon and utilize whatever method is most available and offes assurance of speediest success.

Obviously the Republicans do not subscribe to this recommendation. Under Bush they fiddled while Rome burned and now that Obama is in power, they want to quibble over whether "stimulus" implies "spending" and what "spending" is "pork" versus "job creating". In short, they are doing the opposite of what Shiller recommends.

Here is Shiller's prescription:

In a financial system seize-up such as the one we are now experiencing, we must, putting aside our political and policy differences, fall back immediately on a more basic social contract -- one that dictates that we as a society will protect everyone from major misfortune and keep existing problems from spreading further, subject to the dictates of common sense. That social contract is our most valuable protection, for we as a society can never plan for all possible contingencies.

Here are his specific suggestions to fix the housing crisis:

1. Comprehensive Financial Advice - set up services to help everyone understand risk and access financial techniques to lower their risk.
2. A New Financial Watchdog - something like the FDA to check on financial players and their schemes to regulate and warn consumers about potential risks
3. Default-Option Financial Planning - use the results of behavioural economics to set up defaults which will guide people to making right choices by default
4. Improved Financial Disclosure - continue to make finance more transparent and understandable
5. Improved Financial Database - he was astonished to find in 1980 that there was no database of house prices, so he and Case created the Case/Shiller house price index which is needed to alert people to situations where housing bubbles are growing
6. A New System of Economic Units of Measurement - he favours moving to inflation-adjusted units so that price comparisons over time and trends become more obvious to the financially naive

The book is a fast read and worth your time reading!