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The global financial crisis has made it painfully clear that powerful psychological forces are imperiling the wealth of nations today. From blind faith in ever-rising housing prices to plummeting confidence in capital markets, "animal spirits" are driving financial events worldwide. In this book, acclaimed economists George Akerlof and Robert Shiller challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity.
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The subprime mortgage crisis has already wreaked havoc on the lives of millions of people and now it threatens to derail the U.S. economy and economies around the world. In this trenchant book, best-selling economist Robert Shiller reveals the origins of this crisis and puts forward bold measures to solve it. He calls for an aggressive response — a restructuring of the institutional foundations of the financial system that will not only allow people once again to buy and sell homes with confidence, but will create the conditions for greater prosperity in America and throughout the deeply interconnected world economy.
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The book describes six fundamental ideas for using modern information technology and advanced financial theory to temper basic risks that have been ignored by risk management institutions - risks to the value of our jobs and our homes, to the vitality of our communities, and to the very stability of national economies. Informed by a comprehensive risk information database, this new financial order would include global markets for trading risks and exploiting myriad new financial opportunities, from inequality insurance to intergenerational social security.
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The origins of price movements are poorly known in all speculative markets: markets for corporate stocks, bonds, homes, land, commercial structures, commodities, collectables, and foreign exchange. Why do stock prices often change up or down 20% in a year's time? Why do long term bond prices sometimes change up or down as much? Why do we sometimes find "hot" markets for homes, with prices sometimes jumping or more 20% in a year, after years of stable prices? The book presents basic research on the ultimate causes of price volatility in speculative markets, on the causes that make good economic sense and on the causes that are psychological or sociological in origin.
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This book is a broad study, drawing on a wide range of published research and historical evidence, of the enormous stock market boom that started around 1982 and picked up incredible speed after 1995. Although it takes as its specific starting point this ongoing boom, it places it in the context of stock market booms generally, and it also makes concrete suggestions regarding policy changes that should be initiated in response to this and other such booms. The book argues that the boom represents a speculative bubble, not grounded in sensible economic fundamentals.
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It is proposed that a new class of markets, macro markets, markets for claims on aggregate income and service flows, be established. These markets would help people to manage the biggest economic risks facing society. Our existing financial markets are inadequate to deal with such risks. Our stock markets are markets for claims on corporate dividends, and yet the latter are only a few percent of national incomes, only 3 percent in the United States. The proposal here is to establish liquid international markets for claims on the other 97 percent. These would include markets for national incomes, components and aggregates of national incomes, and real estate.
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