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Save Them From Themselves | Feb 13th at 2:38pm

Posted by Ryan Avent | 1

Robert Shiller notes that a broad theme which might apply to his policy recommendations is the idea that we should democratize finance—that is, we should make finance work for most Americans. As the panel proceeds, it seems as though this largely means helping to protect households from themselves. As was mentioned by Shiller, and as is now being discussed by Christopher Loye, homeownership is a very risky proposition. It is a highly leveraged investment involving a huge share of household resources in an undiversified and volatile asset, the performance of which is highly correlated with economic variables, like wages and unemployment, that influence ability to pay one’s mortgage. This risk sometimes makes homes lucrative assets for purchasers, but buyers also risk bankruptcy, as all too many Americans now realize.

So what does Shiller propose to address these issues? Basically, protections for buyers and would-be buyers. He proposes subsidized financial advice, for instance, to remove the advising role from real estate agents and mortgage brokers who really, really want to sell homes and loans. The idea being, of course, that households often need to be told not to borrow and buy, or at least not to borrow and buy so much.

He also advocates for the creation of things like metropolitan price indexes, housing futures markets and swaps, and other products—tools, basically, which can be used to provide crucial hedges against a declining housing market. There is very little a homeowner can do if the market turns against him or her, aside from selling into the downturn, which further destabilizes prices, or sitting tight while household equity evaporates. Given the stakes, these are pretty terrible options. By using metropolitan price indexes to provide financial products like home equity insurance, downswings can be made less painful for homeowners, and therefore more orderly and economically benign.

Ryan Avent is an economics writer living in Washington, DC. He authors The Economist's economics blog, Free Exchange, and covers environmental and urban policy issues for Grist.