Bob Shiller Warns Fed 'Fire-Fighting' Is "Not A recipe For A Happy Ending"

Tyler Durden's picture

Authored by Robert Shiller, originally posted at Project Syndicate,

If we have learned anything since the global financial crisis peaked in 2008, it is that preventing another one is a tougher job than most people anticipated. Not only does effective crisis prevention require overhauling our financial institutions through creative application of the principles of good finance; it also requires that politicians and their constituents have a shared understanding of these principles.

Today, unfortunately, such an understanding is missing. The solutions are too technical for most news reporting aimed at the general public. And, while people love to hear about “reining in” or “punishing” financial leaders, they are far less enthusiastic about asking these people to expand or improve financial-risk management. But, because special-interest groups have developed around existing institutions and practices, we are basically stuck with them, subject to minor tweaking.

The financial crisis, which is still ongoing, resulted largely from the boom and bust in home prices that preceded it for several years (home prices peaked in the United States in 2006). During the pre-crisis boom, homebuyers were encouraged to borrow heavily to finance undiversified investments in a single home, while governments provided guarantees to mortgage investors. In the US, this occurred through implicit guarantees of assets held by the Federal Housing Administration (FHA) and the mortgage agencies Fannie Mae and Freddie Mac.

At a session that I chaired at the American Economic Association’s recent meeting in Philadelphia, the participants discussed the difficulty of getting any sensible reform out of governments around the world. In a paper presented at the session, Andrew Caplin of New York University spoke of the public’s lack of interest or comprehension of the rising risks associated with the FHA, which has been guaranteeing privately-issued mortgages since its creation during the housing crisis of the 1930’s.

Caplin’s discussant, Joseph Gyourko of the Wharton School, concurred. Gyourko’s own 2013 study concludes that the FHA, now effectively leveraged 30 to one on guarantees of home mortgages that are themselves leveraged 30 to one, is underwater to the tune of tens of billions of dollars. He wants the FHA shut down and replaced with a subsidized saving program that does not attempt to compete with the private sector in evaluating mortgage risk.

Similarly, Caplin testified in 2010 before the US House Committee on Financial Services that the FHA was at serious risk, a year after FHA Commissioner David Stevens told the same committee that “We will not need a bailout.” Caplin’s research evidently did not sit well with FHA officials, who were hostile to Caplin and refused to give him the data he wanted. The FHA has underestimated its losses every year since, while proclaiming itself in good health. Finally, in September, it was forced to seek a government bailout.

At the session, I asked Caplin about his effort, starting with his co-authored 1997 book Housing Partnerships, which proposed allowing homebuyers to buy only a fraction of a house, thereby reducing their risk exposure without putting taxpayers at risk. If implemented, his innovative idea would reduce homeowners’ leverage. But, while it was a highly leveraged mortgage market that fueled the financial crisis 11 years later, the idea, he said, has not made headway anywhere in the world.

Why not, I asked? Why can’t creative people with their lawyers simply create such partnerships for themselves? The answer, he replied, is complicated; but, at least in the US, one serious problem looms large: the US Internal Revenue Service’s refusal to issue an advance ruling on how such risk-managing arrangements would be taxed. Given the resulting uncertainty, no one is in a mood to be creative.

Meanwhile, there is strong public demand – angry and urgent – for a government response aimed at preventing another crisis and ending the problem of “too big to fail” financial institutions. But the political reality is that government officials lack sufficient knowledge and incentive to impose reforms that are effective but highly technical.

For example, one reform adopted in the US to help prevent the “too big to fail” problem is the risk retention rule stipulated by the 2010 Dodd Frank Act. In order to ensure that mortgage securitizers have some “skin in the game,” they are required to retain an interest in 5% of the mortgage securities that they create (unless they qualify for an exemption).

But, in another paper presented at our session, Paul Willen of the Federal Reserve Bank of Boston argued that creating such a restriction is hardly the best way for a government to improve the functioning of financial markets. Investors already know that people have a stronger incentive to manage risks better if they retain some interest in the risk. But investors also know that other factors may offset the advantages of risk retention in specific cases. In trying to balance such considerations, the government is in over its head.

The most fundamental reform of housing markets remains something that reduces homeowners’ overleverage and lack of diversification. In my own paper for the session, I returned to the idea of the government encouraging privately-issued mortgages with preplanned workouts, thereby insuring them against the calamity of ending up underwater after home prices fall. Like housing partnerships, this would be a fundamental reform, for it would address the core problem that underlay the financial crisis. But there is no impetus for such a reform from existing interest groups or the news media.

One of our discussants, Joseph Tracy of the Federal Reserve Bank of New York (and co-author of Housing Partnerships), put the problem succinctly: “Firefighting is more glamorous than fire prevention.” Just as most people are more interested in stories about fires than they are in the chemistry of fire retardants, they are more interested in stories about financial crashes than they are in the measures needed to prevent them. That is not a recipe for a happy ending.

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NotApplicable's picture

Fuck your "a tougher job than most people anticipated," Mr. Shill

knukles's picture

Prediction is very difficult, especially about the future. 
             -Niels Bohr

        "Who let the cat out of the box and where's my half empty glass?"

kaiserhoff's picture

Governments will get interested in "reform" when their cash flow goes negative, and they have no other choice.  Until then, thousands of lies and accounting gimicks serve their needs just fine.

X_mloclaM's picture

it's like Smokey:  "Only You Can Prevent TBTF"

Whaddup with some expectation that it can be 'ended'. Simply never bail anyone out, ever.. and they'd initially remain 'too big'

Anusocracy's picture

Like in the Soviet Union, the problems in the economy are not caused by a lack of government, but by the existence of government.

Wait What's picture

"Caplin’s research evidently did not sit well with FHA officials, who were hostile to Caplin and refused to give him the data he wanted."

No one wants their dirty laundry to get aired out. sometimes it takes years before lies and accounting gimmicks can no longer hide the disaster. Enron, Fannie Mae, Sally Mae, they're all the same. When you start reading about resignations, suicides, and FBI wiretaps, then you can be sure the music has stopped playing and everyone is running for a chair.

Hedgetard55's picture

Actually, that was Yogi who done said that.

kaiserhoff's picture

Yes, it's one of Yogi's funnies,

  but it goes back at least as far as Mark Twain.

JohnG's picture



Yep.  Not hard at all.  Print, shovel to banks, financial repression for the people.

This will never stop until collapse.

The real shame is that those responsible, and responsible becuase they did this on purpose to strip mine the economy, will not suffer.  It will be the average family that suffers.

Unless we get some rope.


Peter Pan's picture

I disagree with your sentiment as I believe that the point he is making is that nothing has been fixed and that the next time we hit a major pot hole we ain't going to get out of it.

Where I do tke issue with him is in him saying that people don't understand the issues. That is a load of shit for two reasons. Firstly, the media is too busy dispering BS and propaganda and secondly those great gods who reside in congress who understand the issues have chosen instead to do nothing but serve the interests of the banks at the expense of the electorate.

TeamDepends's picture

It is Faber who knows the recipe for Happy Ending.

akak's picture

You say "Fay-ber", I say "Fah-ber"

You say "John Maynard", I say "dumbshit"

"Fay-ber", "Fah-ber", John Maynard", "dumbshit"

Let's call the whole depression off.

Jason T's picture

putting out all the wildfires simply leaves forest loaded with dead wood and thicket just waiting for the big one that toasts the entire forest. 


do gooders bitches... the Fausts of economics.  

store your wood and corn.

kliguy38's picture

correct....and when this biatch goes its gonna be one big mutha of a fire....nature calls

NoDebt's picture

Agreed.  2008 was an incredible missed opportinity to clean house.  Now the house is still stuffed with garbage and the tennants pile up more of it every day.  It's like that show "Hoarders: Buried Alive" but with debt, corruption and incompetence.

Sadly, too late now.  We're committed to this path so that when it blows next time it'll be twice as bad.

NOTaREALmerican's picture

I donno,  the top 20% are pretty happy.   That's 60 million happy people.   And, because the other 240 million have no wealth they really don't count for much in a winner-take-all survival-of-the-fittest society.   But, I think that's the kind of society most of us wanted, so - that means the system is actually working.

kaiserhoff's picture

Kleptocrats are pretty happy,

  but why should we feed you?

NOTaREALmerican's picture

You shouldn't.  But, unless you are IN the top 20%  (the top 60 million) you don't count.

Just how the system was designed.  

kaiserhoff's picture

Not true. 

It is productivity in the private sector that creates goods and services and gives meaning and value to any currency. 

Taxation and transfer payments hide and pervert the underlying reality.  Without the private sector, fiat is simply toilet paper.  See Venezuela and Dearest Leader for current examples.

NOTaREALmerican's picture

uhhh..   I don't think you are understanding this.

You (or me, or anybody else) is EITHER in the top 20% (who own 90% of the country's wealth) or NOT.    

If you are NOT you don't have representation, period - end of story.    

Venezuela and the Dearest Leader have their own 20% getting representation.  


cougar_w's picture

The last time we had this it was called Feudalism.

Doña K's picture

From those top 20, 2% or so will survive but the other 18% have nowhere to hide. Cash can crash, PM's are being haunted, RE's price is volatile, highly taxed and mostly iliquid. When the turn down comes these 18 will only do marginally better than the 98% but they will not be happy for sure.

Have a nice day

NOTaREALmerican's picture

Re:  When the turn down comes these 18 will only do marginally better than the 98% but they will not be happy for sure.

Yes, of course.   The top of the top of top will continue to get more and more loot.   There's no other system that exists.

disabledvet's picture

not necessarily. you can hide in "cheap dirt" (meaning land.) Canada has "provinces" and "provincial capitals"...unlike the USA which has "States" and "State Capitals." if "revenue recognition" becomes a problem they will do whatever it takes to generate sales in the USA. In Canada they will do whatever it takes to make sure "Canada" works. That will not entail the raising of debt. In the USA "we'll raise trillions in debt" and do whatever we can to raise cash flow "to the Moon" (and beyond.) 200 km is 120 miles..."exposed metallic core"...meaning PURE nickel and iron. if "half of Mars is seriously pock marked" those could be very valuable ores...of course the same would have to hold true of Earth and the Moon if this hypothesis is true...meaning there are very valuable asteroids on the Moon...which is only 8 hours flight time away. or maybe even here on earth itself:

101 years and counting's picture

how tough is it to print money?  seriously.  i have a computer that creates money out of nothing.  i "wire" the "money" to banker friends for garbage MBS.  does it get any easier?  apparently, mr schiller doesnt have a PhD in Economics 959, aka money printing 101.

youngman's picture

But you get a lot more press coverage if you have a crisis...and do something to try and fix it....not by fixing it before it happens....that is politics

Rainman's picture

yes yes...the hope and blame strategy

Seasmoke's picture

Kind of like Pearl Harbor and 9/11. 

ebworthen's picture

The answers are simple but will never be allowed since parasites control government and run banking.

  1. 20% down on any home purchase, loan held for life by issuing bank.
  2. ZERO securitization (MBS) or default swaps (CDS).
  3. Shut down FHA and Fannie/Freddie.

This would be akin to having adult chaperones and no booze or pot at a teenage party, but that's the point.

NOTaREALmerican's picture

Re:  but that's the point

Which is also why a rule like that can't happen.  

The smart-n-savvy people (the adults) don't want rules anymore than teenages want a party without booze and pot.

Only the people with moral OCD (the children) want rules.

IREN Colorado's picture

You don't really need 20% down but buyers need to be qualified properly without regard to skin color or politics. In many cases that will result in 10-20% down payments. So be it.

No, FHA/VA fannie or freddie or any new "mae"s. An entirely private system, include PMI, which means nobody is TBTF. Which will lead to conservative loan underwriting and collateralization. Bundle those loans and you have a healthy portfolio no matter who owns it.

The above would result in the same basic system we had before the Gov't nationalized housing. It would also cause home prices to fall (which they should), and a sizable recession which is going to happen anyway.

It would avoid the major cluster bubble we are headed toward though....


TheRideNeverEnds's picture



MW Update: U.S. stocks have best day of year.

dexter_morgan's picture

what could possibly go wrong......

caShOnlY's picture

 FIAT money canons, pointed right at the "MARKET" run along and buy some stawks!!!  wait! even the FED calling for a correction!! BUY BAWNDS, BAWNDS I tell you!!

Hedgetard55's picture

Shiller = one more shit for brains "economist".

DOGGONE's picture

Our long-time USA status quo is severely fooling the people -- look here:
The Public Be Suckered

Why? Conpersons-in-control!

q99x2's picture

I read it. Sounded like a government solution for killing time and getting paid.

Al Huxley's picture

Is it too much to ask that these fucking banks just follow a simple borrow and lend model, and just stay the fuck out of the rest?  And that 'investment banks' that get into that stuff be 100% self-accountable when TSHTF for them?  There is no reason for a bank to be TBTF, and a commercial lender should be so conservative that it would be hard to fail to begin with. 

This, I think, is what the general public would like to see by way of 'better risk management'.  Take these parasitic cunts off the gravy train, or hold them accountable for their actions when things go wrong, and stop letting them bet with public money.  That's all most people are asking for.  All this fucking equivocating about how complex the problem is is nothing more than obfuscation to provide cover for the continued rape of the masses by the lucky few sociopathic cocksuckers who've found their way to the top of the banking pillar.

blindman's picture

it is the fascist business model in full expression.
the solution is at hand but the powers that be,
fascists, will never agree or give up their ill
gotten gains. so...
either it will continue until they screw that up
or till thinking people confront them in an
effective manner.

Al Huxley's picture

I know, I'm resigned to the hopelessness of the situation.  The question was largely rhetorical, and the suggested solution was wishful thinking.

blindman's picture

i believe, firmly, in wishful thinking!
in fact it is the root of the only thinking
i have ever identified as effective and
[KR549] Keiser Report: Shrinkflation
Posted on January 14, 2014 by Stacy Herbert
i know it is disney, but even so .....
Alex McMurray "When You Wish Upon a Star"
the solution is at hand or out there,
even in the face of death and total annihilation.
truth can cover and do all that and more.

ajax's picture



Mortgage-backed CDO-squared ... and then cry me a river.  

GrinandBearit's picture

Fuck all these ivory tower types.   These people never worked a real job in their lives.

LMAOLORI's picture



"The financial crisis, which is still ongoing, resulted largely from the boom and bust in home prices that preceded it for several years"


Home prices wouldn't keep rising if they didn't keep lending no? The banks made a killing from sub-prime loans and passed them off as grade A.  In turn when the market went south all the toxic loans that were sold as grade A into pension and investment funds started coming to light and it spiraled out of control.

EXCUSES, EXCUSES, EXCUSES and in the meantime they develop ignorant reasons why they are not only too big to fail but TOO BIG TO JAIL.


Why ‘Too Big to Fail’ Is a Bigger Problem Than Ever

Average people are told ignorance of the law is no excuse but ignorance in government gets a pass as do their criminal cronies.

moneybots's picture

"If we have learned anything since the global financial crisis peaked in 2008, it is that preventing another one is a tougher job than most people anticipated."



max2205's picture

Time to open a forest gumps shrimp boat,  it may be the only one open after the purge

RaceToTheBottom's picture

Schiller is interesting but I cannot believe him since he appears to believe that WS is not filled with Criminals...