Shiller: Financial Infrastructure Must Improve

This column was written by Robert Shiller, author of the new book 'The Subprime Solution: How the Current Global Financial Crisis Happened and What to Do about It.'

There was very poor understanding of the housing and mortgage lending boom of 1997 to 2006 as it was happening. As home prices continued to escalate, national leaders issued virtually no warnings. Instead, many of them congratulated homeowners and the firms that put them into their investments. Because they did not understand the boom, they did not see the end coming.

Now that the end of the boom is a matter of history, it is widely accepted that something was wrong. Still, there is little understanding.

Most financial experts didn't get it then, because they had the wrong model of the economy. They haven't changed their fundamental model, so they still don't get it. As a result, experts underestimate the extent of the damage. Moreover, survey evidence shows, most home buyers today just assume that the current subprime crisis is just a minor interruption in a continuing boom. ...