What if the 2008 subprime mortgage crisis could have been prevented with a simple structural fix? According to a discussion on LessWrong with the AI model Gemini, converting adjustable-rate mortgages to price-indexed mortgages would have largely solved the liquidity crisis that triggered the collapse. Here's how: when subprime ARMs reset to higher market rates, borrowers faced severe payment shock—their monthly obligations spiked because nominal interest rates carried the full inflation premium. An indexed mortgage, by contrast, would separate the real interest rate from inflation adjustments, drastically cutting monthly payments. For struggling working-class and middle-class homeowners, this could have prevented foreclosures. The analysis notes this solution wasn't proposed by mainstream economists at the time, even those like Robert Shiller who had long advocated for inflation-indexed financial instruments. Instead, policymakers stuck with conventional bailouts that preserved the nominal math underlying mortgage-backed securities. It's a fascinating counterfactual: a mathematical fix that might have averted systemic collapse, but one the financial apparatus couldn't consider without collapsing its own architecture.

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