Monday, August 4, 2008

The Subprime Solution

Robert Shiller--of Case-Shiller index fame--is coming out with a new book soon in which he discusses the causes of the recent subprime mortgage market, along with some suggested solutions. The book can be ordered HERE. Go HERE for a brief (20 min) interview where Dr. Shiller touches on some of the things to be found in the book.

My take on Shiller's view after watching the video (though without reading the book, which I most certainly will) is that he proposes an immensely practical solution. Shiller is a thoroughgoing Keynesian economist. But he makes a very strong case for government intervention in the housing market in order to help stem the tide of foreclosures that many families continue to face and will face in the future.

Unlike many of the ardent free-market economists, Shiller sympathizes with families who were caught up in the frenzy of the housing market and took out exotic mortgages, many of which they did not fully understand (or in some cases couldn't ever understand). Since many of the mortgages originated by independent brokers were later repackaged into complex financial securities, there became a misalignment of the incentives facing the originators. The circumstances became that it was in the interests of mortgage brokers to close and package as many mortgages as possible, to the detriment of developing a specific mortgage designed to fit the individual needs of each customer. Although it would be nice to say that those buying the products they could not understand should have done their own due diligence and be made to suffer the consequences of this mistake (and that any bailout should not be forthcoming as the funds which would finance such a bailout will inevitably come from people that had the foresight or presence of mind not to sign on to something they could not understand), Shiller dismisses this saying that this kind of punishment would be similar to the punishing of an average german after WWI for the transgressions of the Kaiser. In short, punishing people for the problems that developed from areas in which they had no control or influence would be incredibly unfair. But Shiller's most insightful reason not to allow such a large amount of people to be thrown out of their homes is that this will invigorate an unwarranted hostility toward capitalism, and this would be a much more unfortunate outcome than any potential bailout. Shiller believes that the common person who is not familiar with the Federal Reserve's bubble creation, or how such a thing could ever develop and effect something like the price of a house should not be made to pay for the mistakes of the so-called experts in charge of the organizations that attempt to steer the macro-economy.

I look forward to Shiller's book, and will further contemplate his argument. I had not yet considered the potential impact of a mass foreclosure on the overall public opinion toward our market economy, and, I must admit, this seems to be as good as any justification for the bailout as any I've yet come across.

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