BOOK REVIEW: Shiller's Subprime Solutions

Who's to blame for the subprime crisis? Real estate speculators, mortgage brokers, underwriters, ratings agencies, borrowers, appraisers and investment bankers have come under scrutiny for the roles they played.

The answer is all of the above, according to Robert Shiller, the best-selling author of Irrational Exuberance. In his latest work, The Subprime Solution: How Today's Global Financial Crisis Happened and What to Do about It , Shiller explains that greater financial "democracy" and a "contagion of ideas" led many to conclude a "new era" had been reached in real estate. The public expected prices to rise continually. Worse, Shiller wrote: "The very people responsible for oversight were caught up in the same high expectations for future prices..."

The result of this contagion was a massive real estate bubble. It began to burst in late 2005, and the bubble has continued to deflate at an increasing pace that infected subprime mortgages and eventually hit prime mortgages, the credit markets and stock markets. It's been bad.

Shiller calls for aggressive short-term action before we are all brought down. In the long term, the financial system requires more information and more innovation, completing the democratization of our financial system, he concludes.

Why listen to Shiller at all? He remains a rare breed -- an academic who has transformed economic theory into useful real world solutions. As a renowned professor of economics at Yale University, he remains the expert on U.S. housing markets. He and Karl Case, professor of economics at Wellesley College, tracked housing prices back to 1890 and developed the S&P/Case-Shiller Home Price Indices . The indexes allow for derivatives trading on the Chicago Mercantile Exchange (CME Quote - Cramer on CME - Stock Picks) in 2006.

Former Treasury Secretary Lawrence Summer says: "Robert Shiller is two for two in predicting and identifying bubbles that will burst."

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