Since an aspect of the meltdown was that the firms were relying on carry trade to such a degree, I find it funny to worry about the long marginalized “little guy” who has money in the sausage maker. Funny to wory at the back end, and not at the front end. Funny to worry after the margins and exposures put them at risk in a game they should not have been funding. Let the carry trade player cover his own chip buy-in. Anything else is, frankly, another form of theft!

I hope this is not somewhat off topic.

According to Shiller, the sole cause of the subprime crisis was “the social contagion of boom thinking” (@41); lenders, the investors in the loans they sold off, and rating agencies also all believed there would be no bursting of the bubble, and Greenspan & other regulators didn’t “believe that there could ever be a housing crisis of the proprotions we are seeing today” (@50-51). Loose monetary policy was a “product” of the bubble, and not an exogenous cause (@ 48-49). The source (or at least, “disporportionate” source) of this contagion was subprime borrowers who “were consumed by the mere thought of somehow gaining a foothold in the housing market” (@50). I suppose they are also to blame for CDSs.

Low-cost, government-subsidized financial advice to low-income people is part of Shiller’s cure. Had people received “one-on-one, Suze Orman-style” advice from “trusted advisers[,] [t]he crisis might never have occurred” (@126). Surely “most” financial advisers “must have at least had some sense that the housing boom might not continue” (@127) — notwithstanding that even ratings agencies and Fed officials either didn’t believe this or didn’t recognize its implications.

His book also includes a big defense of “bailouts” — but for “preventing distress among people of modest means,” i.e. borrowers (@111). Yet in a 09/20 interview with Forbes, he said of the current bailouts, “[I]t sounds like they’re kind of doing what I proposed in my chapter [in The Subprime Solution] on bailouts.” See http://www.forbes.com/2008/09/20/shiller-buble-economy-biz-wall-cx_jz_0920shillerqa . Kind of, but not exactly — they’re bailing out different folks.

Yes, the guy predicted the bursting of two bubbles, but sorry if I’m not buying his solutions this time.

I haven’t yet found any article critically analyzing the CWM. Surely Shiller has an answer for this– suppose that CWM had existed in 2000 as a substitute for the low-money-down loans. Incomes stayed flat for 2000-05, but housing went up 50%. How would that have worked favorable for borrowers? (I suppose it would have chilled the market somwhat… but so would responsible lending, no?)

FTR, Krugman has cited PIMCO’s Paul McCulley as one of the earliest to predict the housing bubble in 2001, figuring that the Fed would want to substitute the housing bubble for the stock bubble.