Executive Times






2008 Book Reviews


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








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Robert Shiller’s new book, The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It, presents a manifesto for the repair of our financial systems and institutions. Shiller presents both short term and long term actions that he believes will restore confidence and lead to ongoing stability. Here’s an excerpt, from the beginning of Chapter 5, “A Bailout By Any Other Name,” pp. 87-88:


Virtually all the solutions to the subprime crisis already tried or already proposed in the United States have as­pects of a bailout to them. This is true of the interest rate cuts by the Fed; the Fed's lending to troubled institutions under the auspices of the TAF, the TSLF, and the PDCF; the tax rebate checks mailed out to individuals; the extension of loan limits by the FHA; and the extension of mortgage ceilings by the government-sponsored enter­prises Fannie Mae and Freddie Mac.

Let us be clear about what the word bailout means. Actually the term has only recently acquired promi­nence, and the word itself is not yet even listed in the Oxford English Dictionary. A bailout is a rescue by the government or another entity of an irresponsible person or entity arising from a failure to follow rules or take reasonable precautionary steps. In the popular use of the term, a parent who offers a late-night meal to a child who refused to sit down at the family dinner, and is now whining about being hungry, is offering a bailout.

The earliest use I could find of the word bailout in this sense, from a computer search of English-language newspapers, was in 1950, in the context of criticizing the activities of the Reconstruction Finance Corporation, established during the Great Depression to rescue fail­ing companies by lending them money. Prior to that, the term appears to have been used exclusively to refer to the act of a pilot parachuting from an airplane in trouble.

Of course, any postcontract government action that invalidates a prior contract or expectation will be called unfair by some. In the nineteenth century the preferred expressions were the "sponge of insolvency" or "pre­mium on hazard and overtrading" But the term bail­out is more intense, with its suggestion of abandoning an aircraft in midflight—leaving it to crash and burn on someone else.



Shiller is knowledgeable and clever, and The Subprime Solution’s 200 pages can be read briskly. What follows reading this book is thoughtful reflection about whether or not we agree with his approaches.


Steve Hopkins, November 20, 2008



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The recommendation rating for this book appeared

 in the December 2008 issue of Executive Times


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