The Sub Prime Solution

3rd March, 2009

That’s the name of a book by an American economist called Robert Shiller. Got home last night from canvassing a part of Stoneybatter and started it.

Only a couple of chapters into it and I can already see that this is a superb work. It’s very insightful at setting the policy response to the current credit crunch in a historical context. I’ll probably be writing about this a bit in the coming days.

It starts off by looking at the institutions that were created in the Great Depression and the following years. They include the Home Owners Loan Corporation, the Federal Housing Administration, the Federal Deposit
Insurance Corporation and the Securities and Exchange Corporation. Shiller argues that we have no equivalent to this kind of innovation now. The counter arguement to this is that we now have a wide range of nationalised or partially owned banks . A whole new range of public institutions have been created by this.

What I have learnt from this book is that the focus of FDR was on creating institutions that would regulate and structure commercial activity. It is very clear that we are not doing this at the moment. The recent EU report into banking regulation did not include a proposal for a new EU wide regulator. This was apparently because the authors of the report did not believe it would ever happen! Similarly, there has been a lot of debate here in Ireland about the regulators themselves but not a lot about their institutional structure.

The other interesting point in the book is the size of stimulus been provided to Western economies. At time of writing (07) the American stimulus was small. This has changed with the new president. However Europe
(not to mention Ireland) does not really have anything to show. In contrast, FDR invested a huge amount of money to get the world economy moving. The fact that investing additional money is not even an option for
many Western economies just shows how much rethinking we need to do.