Bests & Worsts Reviews from Amazon

Robert Shiller's track record was impressive at first. He wrote Market volatility in 1992 outlining how stock price volatility was due to psychological speculation as it was disconnected from economic fundamentals. He was right as the stock gyrations in 1987 and 1989 demonstrated. In 2000, he wrote the excellent Irrational Exuberance stating stock prices bubbled up and were bound for a crash. Within three months the NASDAQ did exactly that loosing more than half its value taking the rest of the market on a three year brutal downturn (dot.com Bubble). At this stage, we thought Shiller was blessed with superior insight. Then, he lost his edge by envisioning retail financial insurance products to protect against risks often not worth covering as introduced in his strange The New Financial Order: Risk in the 21st Century. This book recycles many of those confused concepts. In "The Subprime Solution" Shiller diagnoses the cause of the Subprime crisis and also develops a set of short-term and long-term solutions to fix and prevent this crisis. His diagnosis is OK. He attributes the overarching cause of the Subprime crisis to bubble psychology. This diagnosis is a repeat of "Irrational Exuberance" focused on residential real estate instead of stock markets. He ties a lot of symptoms such as the increasingly lenient underwriting, lenient Moody's MBS ratings, and investors appetite for MBS to bubble psychology. He thinks bankers, MBS investors, Moody's, hedge funds, homeowners, and condo flippers all thought they could throw caution to the wind since the value of the underlying collateral (home) would shore up all boats. When Shiller comes up with recommendations he is not convincing. In the short-term he simply suggests we bail out everybody by reviving the Home Owners' Loan Corporation (HOLC) first established in 1933 but no longer in existence. The former HOLC accepted mortgages as collateral for loans to mortgage lenders so long as the mortgages had more lenient terms than the market. This recommendation has several flaws to it. First, it runs into moral hazard. It would bail out with taxpayer's money homeowners who never had the financial resources to buy a house and condo flippers who speculated with other people's money. Second, a good deal of those mortgages has been securitized into complex collaterized bond structures with many tranches sold to international investors. Those mortgages administered by bond trusts are not pledgeable to an HOLC organization. Shiller's long term recommendations are ineffective. Here he repeats many of the retail insurance products he envisioned in "The New Financial Order." His first recommendation is nationwide government subsidized retail financial advice. Yet, all the financial advice prospective homeowners need is to ask themselves if they can afford the mortgage. If the borrower is not numerate, the creditor should operate in a regulatory environment to be forced to make a prudent decision on his behalf. Shiller recommends the adoption of a new economic currency that would be adjusted for inflation. He feels this would improve price information of homes. In a country with very moderate historical inflation such an economic unit adds much confusion without merit. Shiller also thinks that his creation (with the Chicago Board of Trade) of home price index futures will eliminate bubbles because international investors will short (sell futures) on cities whose home prices appear to have bubbled. But, such futures markets have not eliminated bubbles in stock and commodity prices. Why would they eliminate bubbles in residential real estate? Additionally, those home price index future markets have been in existence for already two years. And, they don't seem to get off the ground. Trading volume is not sufficient to provide valuable price information. Other strange recommendations include his "continuous-workout mortgage" whose term would be adjusted downward to reflect the current income of the specific occupation of the borrower. This entails a huge transfer of risk to the creditors which would result in much higher mortgage rates. Another recommendation is home equity insurance for the borrower. But, it is not the borrower that bears the risk on the collateral value, it is the creditor. This insurance would be of little value to the borrower. Another recommendation is livelihood insurance insuring one's income from the risk of one's specific occupation. This product is not readily feasible. It also understates how transferable many professional skills are and how liquid are labor markets are. In summary, his long term recommendations do not address the Subprime crisis. I recommend a far better book on the subject: Charles R. Morris The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash. Also, Shiller feels cities are commodities with urban amenities easily replicable. For an excellent book that explains why this is not so, I recommend Richard Florida's Who's Your City?: How the Creative Economy Is Making Where to Live the Most Important Decision of Your Life