Shiller: The subprime solution

Shiller, RJ. 2008. The subprime solution. Princeton University Press.

The subprime crisis is a real-estate bubble that spread to finance. It has produced conditions that are potentially catastrophic, and needs to be addressed in a serious and direct way.

This is not, however, a crisis that should signal the retreat from finance capitalism. In fact, we should be doing more to create infrastructures that promote markets that are designed to mitigate risk. We should also be increasing transparency and moving towards a situation where the system is able to avoid the promotion of bubbles through increased information. As in Shiller's other work, there is a heavy focus on the psychological aspects of market behavior.

"The key to the subprime solution, to preventing future crises like the current one, as well as mitigating its aftereffects, is democratizing finance--extending the application of sound financial principles to a larger and larger segment of society, and using all the modern technology at our disposal to achieve that goal" (115).

In the index, there is no mention of either derivatives or collateralized debt obligations.

Shiller: Irrational Exuberance

Shiller, RJ. 2006. Irrational exuberance. Princeton University Press.

"How we value the stock market now and in the future influences major economic and social policy decisions that affect not only investors but also society at large, even the world. If we exaggerate the present and future value of the stock market, then as a society we may invest too much in business startups and expansions, and too little in infrastructure, education, and other forms of human capital. If we think the market is worth more than it really8 is, we may become complacent in funding our pension plans, in maintaining our savings rate, in legislating an improved Social Security system, and in providing other forms of social insurance" (xii).

The author presents a wide variety of evidence to show that the stock market is currently overvalued by historical standards. Part of the argument is that the investors who are part of the stock system to not understand the constructed nature of markets, and that their growth does not necessarily represent the underlying value of assets. Human psychology plays a clear role in determining stock prices, and the author makes the claim that investment has become irrational and exuberant.

The book goes through a wide variety of explanations for the causes of this excessive investment in equities.