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 Robert J. Shiller is the Arthur M. Okun Professor of Economics at Yale University, and Professor of Finance and Fellow at the International Center for Finance, Yale School of Management. He has written on financial markets, financial innovation, behavioral economics, macroeconomics, real estate, statistical methods, and on public attitudes, opinions, and moral judgments regarding markets. He is the co-originator of the S&P Case Shiller Home Price Index, the leading index of home price values. His most recent book, The Subprime Solution, is available through the link above.
In your book, you note that you are often asked for economic forecasts, but rarely asked the following question: “What should be done to solve the fundamental problems highlighted by the subprime crisis, and how can we set up new or reformed institutions that might help insulate our society against the fundamental problems that underlie the crisis?” Your book is devoted to answering this question, but perhaps you can discuss a few of your recommend changes – those that you consider most important.
The subprime crisis is the result of a bubble and of the failure to manage the risks of that bubble. The best way to improve our ability to manage those risks is to develop better markets and better financial information systems, and to improve the capabilities of retail banking institutions.
I have a distinctive take on the problem. Many people are unsympathetic to financial markets. But I believe they represent the opportunity to avoid crises like this in the future. Risk management must be more thorough and people must be able to better understand the markets.
If I must assign priorities to potential solutions based on the urgency of the crisis, then we will be talking about bailouts, of which I am less enthusiastic. But, if we look at the long term threats posed by this crisis, then the root problem was a failure to manage risk. This crisis might have been prevented by good financial advice. I would like to see financial advisors better positioned to provide advice to lower income people. Currently, the wealthy are well-served by advisors. The internet is improving our access to knowledge, but people need personal attention when it comes to complex financial decisions.
With better financial advice, consumers would have been able to avoid dangerous subprime mortgages. There might still have been a bubble, but it would have been less severe. Part of the problem is that uneducated consumers took on products they couldn’t afford or understand Advisors would have mitigated the severity of this.
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