Written by Robert J. Shiller, Yale University:

Every time there is a major financial crisis, and there have been quite a number of them in history, we find that there are many who are ready to dwell on blaming people and institutions and only very few who offer really serious and constructive new proposals for improvements in our financial system that can repair the damage and reduce the impact of future crises. It is much harder to do the latter, as it requires coming to an understanding of the real origins of the crisis. The causes of the crisis are typically multiple, and understanding them requires extensive knowledge, of the real nature of  financial arrangements as they appear at this point in history, of the laws and conventions that regulate them, and the kinds of human failures that underlie their misapplication. Constructive solutions require also an analytical framework that allows us to use basic economic theory to evaluate government responses.

Too Big to Save? provides us with just such an understanding and analytical framework. The policy proposals offered here should be taken seriously.

The analysis of the crisis that is provided here is a pleasure to read. It brings together a strong list of relevant facts in connection with an illuminating interpretation.   For example, Bob documents how very low interest rates created a demand for mortgage-backed securities with high yields — which could be met due to the weak regulation of mortgage lendings and the eagerness of the credit rating agencies to hand out AAA ratings.  He provides a wealth of information that can enable the reader to assess his argument.

Second, Bob develops several principles for evaluating the government’s bailout efforts. He criticizes the Treasury’s peculiar reliance on preferred stock as an instance of one-way capitalism — where taxpayers bear almost all the downside losses of bank failures with little upside if a troubled bank is rehabilitated. Ironically, they appear to have chosen the preferred stock rather than common stock in part because they wanted to keep the appearance of capitalism (not “nationalizing” the banks) more than its substance. This is a book about the real substance of our capitalist economy.

He also articulates specific tests for justifying bailouts and then shows why many recent bailouts do not meet these tests. We need to view bailouts in terms of our economic theory as well as we can, for only then can we have any semblance of an economic justification for these last minutemeasures, rule-changes in the midst of the game.

Third, Bob presents an integrated view of how US financial regulation should be structured in the future.  He puts meat on the bone of systemic risks — with the Fed as the monitor of such risks and the functional regulators implementing remedial measures.  Since government guarantees have become so broad, he argues for a different type of board of directors to help regulators monitor the financial condition of megabanks.

Of course, not everyone agree with all his proposals since the book includes so many.  This is not a book with a lengthy discussion of the past plus a few future-looking proposals outlined in the last few pages.  It is a thoughtful account on nearly every page. It keeps its momentum going, bringing us to a position where we can really evaluate how we ought to proceed from here and how our financial economy should evolve over the coming years.