The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It by Robert J. Shiller

The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do About It by Robert J. Shiller provides an insightful analysis of the causes of the global financial crisis and the necessary steps to ensure economic stability in the future. Shiller, a Nobel laureate in economics, argues that the financial crisis was fueled by a combination of structural issues, including the deregulation of financial markets and the emergence of securitization. He explains how these issues created a “perfect storm” for the global economy.

Shiller begins by examining the origin of the global financial crisis. He explains how an interconnected world of global markets and financial products have amplified the effects of market shocks and bubbles. He traces the cause of the crisis back to the rise of securitization in the late 20th century, wherein new complex financial products such as derivatives and mortgage-backed securities (MBS) enabled overly-aggressive speculation in the markets. These financial products were further enabled by a deregulation of financial markets, which led to a plethora of new lenders, investors, and borrowers who were looking to get in on the housing market and generate large profits in the process.

The result was overvaluation of homes, widespread mortgage defaults, and the collapse of the housing market. In turn, the cascading effects of the crisis were felt by nearly every sector of the global economy. The book documents how the banking sector in particular was hit hard, with the stock prices of many banking firms falling to near zero or even negative. Further, the credit market seized up, restricting lending, and unemployment surged as companies were forced to close or cut back.

Shiller then goes on to explore the potential solutions to the crisis. He identifies several key steps that should be taken in response to the crisis. First, he calls for increased regulation of financial markets, including stronger regulations for derivative products. Next, he suggests shoring up the banking sector with tighter restrictions on bank activities. Finally, Shiller advocates for wider implementation of financial education for citizens, focusing on providing people with basic knowledge about financial products and investing.

The book concludes by noting that in the long-term, the goal is to not only address the current crisis but to lessen the chances of future ones. To this end, Shiller argues that global economic policy makers need to be more proactive in instituting institution building and improving the regulatory environments of countries. This recommendation extends to international organizations such as the World Bank and International Monetary Fund, which should continue to promote economic policies that are beneficial to the global economy as a whole.

The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It by Robert J. Shiller offers an illuminating and comprehensive look at the global financial crisis. Shiller masterfully dissects the array of contributing factors and explains why it is essential that governments and international organization take steps to build institutions and provide global oversight to ensure that such a crisis never happens again.