Shiller Feeds

A Crisis of Understanding

2010-03-14T14:26:00.000-07:00

By Robert J. Shiller at Project Syndicate:

NEW HAVEN – Few economists predicted the current economic crisis, and there is little agreement among them about its ultimate causes. So, not surprisingly, economists are not in a good position to forecast how quickly it will end, either.

Of course, we all know the proximate causes of an economic crisis: people are not spending, because their incomes have fallen, their jobs are insecure, or both. But we can take it a step further back: people’s income is lower and their jobs are insecure because they were not spending a short time ago – and so on, backwards in time, in a repeating feedback loop.

It is a vicious circle, but where and why did it start? Why did it worsen? What will reverse it? It is to these questions that economists have been unable to offer clear answers.

Read the full commentary

Economic View: Mom, Apple Pie and Mortgages

2010-03-06T14:22:00.000-08:00

By Robert J. Shiller in the NY Times:

FOR decades, the federal government has subsidized housing — particularly owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration propping up the housing market by issuing guarantees for investors on most new mortgages.

But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? Is this nothing more than a sacred cow in American society — a political necessity because so many voters own homes and are mindful of their resale value?

In fact, there is much more to the history of subsidizing housing. While the crisis in the housing market shows that our current approach is far from perfect, there is a certain wisdom behind it, related not only to economic stimulus but also to the preservation of a sense of national identity. It’s important to remember this as we consider re-engineering our institutions as the crisis ebbs.

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Can leaders revive animal spirits?

2010-02-17T15:29:00.000-08:00

By Robert J. Shiller at FT.com:

We expect our political leaders to manage the level of economic activity by employing fiscal and monetary tools such as interest rates, tax incentives and stimulus packages to avoid recessions. However, in the aftermath of the bursting of the largest bubble in history, in the property market as well as other markets, we see that a social-psychological phenomenon, over-confidence, was not managed by leaders, and its subsequent collapse represents the deepest cause of the financial crisis.

We can imagine that words of warning might have been effective in stopping the bubble before it got so big. Alan Greenspan’s “irrational exuberance” speech in 1996 had a briefly chilling impact on stock markets around the world. However, in the years just before the crisis, leaders failed either to issue firm notes of caution or to restrain over-enthusiastic investment by changing economic incentives.

Now the danger is that we will languish in a period of under-confidence. The over-confidence of a few years past, which encouraged many people to leverage themselves in questionable investments in property, has now left us with a legacy of damaged portfolios. In this uncertain economic climate, businesses are hesitant to invest and consumers reluctant to spend. For a particular business or family, such hesitation may seem wise. However, the cumulative impact of individual decisions based on low confidence is an economy that stalls, either failing to recover or slipping once again into a recession.

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Stuck in Neutral? Reset the Mood

2010-01-30T16:04:00.000-08:00

by Robert J. Shiller in the NY Times:

THE United States and other advanced economies may be facing a long, slow period of disappointing growth.

That is a widespread concern, as recent polls demonstrate. A USA Today/Gallup poll, for example, found this month that about two-thirds of Americans say they think that economic recovery won’t start for two more years, while 28 percent say it won’t begin for at least five years.

Among students of history, there are fears that we will suffer the type of chronic economic malaise that afflicted the world after the 1929 stock market crash, or that weakened Japan after the puncturing of twin stock and housing market bubbles around 1990. The post-1929 depression did not end for about a decade, and Japan has still not emerged from its post-1990 slowdown.

The fears themselves are an integral part of the problem. Economists have a tendency to assume that everyone’s behavior is rational. But post-boom pessimism is a factor driving the economy, and it is likely to be associated with attitudes that may be enduring.

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Fixing the plumbing in banking system

2010-01-22T11:26:00.000-08:00

By Robert J. Shiller at ShanghaiDaily.com

THE severity of the global financial crisis has to do with a fundamental source of instability in the banking system, one that we can and must design out of existence.

In a serious financial crisis, banks find that the declining market value of many of their assets leaves them short of capital. They cannot raise much more capital during the crisis, so, in order to restore capital adequacy, they stop making new loans and call in their outstanding loans, thereby throwing the entire economy - if not the entire global economy - into a tailspin.

This problem is rather technical in nature, as are its solutions. It is a sort of plumbing problem for the banking system, but we need to fix the plumbing by changing the structure of the banking system itself.

Many finance experts - including Alon Raviv, Mark Flannery, Anil Kashyap, Raghuram Rajan, Jeremy Stein, Ricardo Caballero, Pablo Kurlat, Dennis Snower, and the Squam Lake Working Group - have been making proposals along the lines of "contingent capital."

The proposal by the Squam Lake Working Group - named for the scenic site in New Hampshire where a group of finance professors first met to devise ideas for responding to the current economic crisis - seems particularly appealing.

Read full commentary

Continued housing volatility a sure bet

2010-01-04T16:27:00.000-08:00

By Robert J. Shiller at chinaview.cn

BEIJING, Jan. 4 -- Volatility in the housing market has long been known, but until now it has never been visible in so many places around the world at the same time. Indeed, the year 2009 might even be a milestone marking a new era of volatility.

Since 2000, we have seen the most dramatic evidence ever of speculative bubbles in markets for owner-occupied homes. Home prices exploded after 2000 in North America, Europe and Asia, and in many isolated places elsewhere in the world. Markets peaked in 2007, and then fell sharply in many of these places with the onset of the global financial crisis. Surprisingly, prices rebounded in some places in 2009. It seems the story never ends.

In the United States, the S&P/Case-Shiller 10-City Home Price Index recorded the biggest turnaround since the index began in 1987, rising 5 percent (a 15 percent annual rate) from April to August 2009, after having fallen 7 percent (a 21 percent annual rate) in the four months from December 2008 to March 2009. Recent increases in home prices have also been seen in Australia, the UK, South Korea, Singapore, Sweden and the Hong Kong Special Administrative Region, and optimistic talk is heard in still more places.

Read the full commentary

Why We'll Always Have More Money Than Sense

2009-12-30T15:15:00.000-08:00

by Robert Shiller in Newsweek

When it comes to market bubbles and how they are created, very little, if anything, has changed. This is because human psychology has not changed. Massive bubbles are created when large numbers of people buy into "new era" stories that exaggerate how much the world has improved. For example, in the past few years the global equities and housing bubbles were driven by a giddy faith that world markets were on a tear and prices would go up indefinitely. Our animal spirits are sparked by these tales; we find them irresistible. And since as animals we're also given to a herd mentality, in a bubble we tend to invest too much in the most popular stories—and continue to do so even after the bubble bursts.

As I wrote in my book irrational exuberance in 2000, one of the key stories of our time is the triumph of capitalism. This theme was underscored by the disintegration of the Soviet Union and China's shift to a market economy. But many true believers got the details wrong—and became convinced, for example, that capitalism means market prices will always go up.

In the several decades since the worldwide rise of market economies, our perceptions of ourselves have changed greatly—while young people back then might have become hippies, deeply skeptical of business, today's young people are very concerned with making money. They might have temporarily questioned the idea of capitalism after the financial crisis, but quickly shrugged off their qualms. People still largely believe in the ownership society and in markets. They believe in the importance of doing business, and they generally believe that we all have a responsibility to take care of ourselves. So much for the idea that we're all socialists now; while many countries do take care of society's losers to a significant extent, we don't idealize doing so, as we once did. And this unadulterated belief in capitalism helped to fuel the bubbles that led to the crash.

Read the full commentary

Economic View: A Way to Share in a Nation’s Growth

2009-12-27T10:54:00.000-08:00

By ROBERT J. SHILLER in the NY Times:

CORPORATIONS raise money by issuing both debt and equity, the latter giving investors an implicit share in future profits. Governments should do something like this, too, and not just rely on debt.

Borrowing a concept from corporate finance, governments could sell a new type of security that commits them to paying shares in national “profit,” as measured by gross domestic product.

Historically, one impediment to such a move was the difficulty in accounting on a national scale: governments didn’t even try to measure G.D.P. until well into the 20th century.

Although G.D.P. numbers still aren’t perfect — they are subject to periodic revisions, for example — the basic problem has been largely solved. So why not issue shares in G.D.P. now?

Such securities might help assuage doubts that governments can sustain the deficit spending required to keep sagging economies stimulated and protected from the threat of a truly serious recession. In a recent pair of papers, my Canadian colleague Mark Kamstra at York University and I have proposed a solution. We’d like our countries to issue securities that we call “trills,” short for trillionths.

Read the full commentary

Economic View: What if a Recovery Is All in Your Head?

2009-11-21T14:45:00.000-08:00

By ROBERT J. SHILLER in the NY Times:

Beyond fiscal stimulus and government bailouts, the economic recovery that appears under way may be based on little more than self-fulfilling prophecy.

Consider this possibility: after all these months, people start to think it’s time for the recession to end. The very thought begins to renew confidence, and some people start spending again — in turn, generating visible signs of recovery. This may seem absurd, and is rarely mentioned as an explanation for mass behavior late in a recession, but economic theorists have long been fascinated by such a possibility.

The notion isn’t as farfetched as it may appear. As we all know, recessions generally last no more than a couple of years. The current recession began in December 2007, according to the National Bureau of Economic Research, so it is almost two years old. According to the standard schedule, we’re due for recovery. Given this knowledge, the mere passage of time may spur our confidence, though no formal statistical analysis can prove it.

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The Ghost in the Recovery Machine

2009-11-14T09:00:00.000-08:00

by Robert J. Shiller

The International Monetary Fund’s October World Economic Outlook proclaimed that, “Strong public policies have fostered a rebound of industrial production, world trade, and retail sales.” The IMF, along with many national leaders, seem ready to give full credit to these policies for engineering what might be the end of the global economic recession.

National leaders and international organizations do deserve substantial credit for what has been done to bring about signs of recovery since the spring. The international coordination of world economic policies, as formalized in the recent G-20 statement, is unprecedented in history.

But one also suspects that world leaders have been too quick to claim so much credit for their policies. After all, recessions generally tend to come to an end on their own, even before there were government stabilization policies. For example, in the United States, the recessions of 1857-8, 1860-61, 1865-7, 1882-85, 1887-88, 1890-91, 1893-94, 1895-97, 1899-1900, 1902-04, 1907-8, and 1910-12 all ended without help from the Federal Reserve, which opened its doors only in 1914.

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Yale Q6 Fall 2009 Q&A with Dr. Shiller

2009-11-05T17:30:00.000-08:00

Decades of economic research have assumed people pursue their goals in a rational manner, discounting the effects of emotion, bias, error, and other irrational forces. Robert Shiller argues that economists need to take a closer look at how people make decisions.

Q: How important is it to understand what people are thinking and feeling when you are trying to understand the economy as a whole?

That's been a controversial question in economics for a long time. Milton Friedman wrote a collection of essays in 1953 called Essays in Positive Economics, in which he argued that you shouldn't try to infer what people are thinking because people really can't tell you what they're thinking. If you ask people why they did something, they will give you a conventional answer or mislead you. The idea was that the essence of economics is to look at the constraints that people have and assume that people are behaving rationally, subject to those constraints, and interpret economic data as reflecting that rational behavior. That is the defining characteristic of economics as a discipline — as opposed to psychology as a discipline — that, in understanding something as massive as the economy, it's best to look at people's actions, not their ostensible reasons. There is some appeal to that. I just wish it were more right.

I can get enthusiastic talking about this theory because, in some respects, it is good. To give an example, suppose you are trying to understand the seasonality of food prices — why they go up in the winter and down in the summer. Well, it's pretty obvious that it has something to do with the weather as a constraint, but you better think it through, because we live in a global economy, and when it's winter up here, it's summer down south. Obviously they'll ship food from one hemisphere to another. That puts a limit on seasonality. This is pure economics, and I'm sure it's right, because the seasons occur year after year after year, and you have people whose job is to ship fruits and vegetables and food around. They're going to find the best pattern of shipping, given all the costs. It wouldn't make a lot of sense to ignore that. Thinking that people get emotional in the summer, or something like that, would probably be wrong.

Read full interview

A Bounce? Indeed. A Boom? Not Yet.

2009-10-11T18:14:00.000-07:00

by Robert J. Shiller in the NY Times:

THE sudden rise in home prices suggests that the psychology of the market has shifted substantially. But what should we expect in the months ahead? Not necessarily that we’re entering a new housing boom. To a large extent, where we’re heading depends on what home buyers are thinking.

Some clues are found in the annual home-buyer surveys that Karl Case, the Wellesley economics professor, and I have run for years. For the surveys, we canvas recent home buyers in four cities — Los Angeles, San Francisco, Milwaukee and Boston; the surveys are now being conducted under the auspices of the Yale School of Management. We have just received the 2009 results, with responses from June and July.

This year’s survey coincides nicely with the upturn in home prices, the sharpest change in direction we have ever seen. The data show that the Standard & Poor’s/Case-Shiller 10-City Composite Home Price Index for the United States rose 3.6 percent between April and July. While that is not a whopping increase, it followed a decline of 4.8 percent in the previous period, between January and April.

The suddenness of this shift surprised me. In my column in June, I wrote that home prices might well continue to decline for years. As of that time, the S.& P./Case-Shiller price index had fallen every month for almost three years. Add to that the prospect of continuing high unemployment and a weak economy for years to come, and the prospects for home prices did not seem rosy.

Read the full article

Q&A: Shiller Sees 5 Years of Stagnant Home Prices

2009-09-30T14:42:00.000-07:00

From the Wall Street Journal:

Robert Shiller, the Yale University economist who famously predicted the housing bust, was awarded the Deutsche Bank Prize in Financial Economics today. In this interview, he talks about the state of the housing market and the implications of low interest rates.

Is the slump in U.S. home prices bottoming out?

Shiller: The situation has definitely changed. With our numbers — the S&P/Case Shiller home price index — going up sharply. It looks like a major turnaround. We’ve been watching that for three months now, and we have some concern that it could be an aberration and temporary. But, at this point, it seems to be evident in just about every city in the U.S. That suggests it’s real. But it probably isn’t the beginning of a major boom, just because the economy is in such bad shape. There’s also a chance that it will reverse. It’s still only three months old, so it’s very hard to be sure at this point. The most likely scenario is that it won’t continue at this high rate of increase, but that it will neither go down a lot, nor up a lot.

So the index will move sideways for a while?

Shiller: Yes, for a while, meaning five years.

What are the main factors driving U.S. house prices? What could push them up, or cause another slump?

Shiller: The main factor is the world economic crisis and the efforts of governments around the world to stimulate the economy. Parts of those efforts have been directed at the housing market. In the U.S., there is an 8,000 dollar first-time home buyer’s tax credit which expires at the end of November. That’s a reason for concern, as it comes to an end. Also, the Federal Reserve has a plan to buy $1.25 trillion worth of mortgage-backed securities to support the housing market. They are most of the way through the program and anticipate phasing it out at some time in 2010 - that’s another thing that will go away. We’ve yet to see how the housing market will continue. Part of the problem is that people are buying now rather than later. When later comes, there could be a downturn in the market.

Read full interview

In defence of financial innovation

2009-09-27T17:50:00.000-07:00

by Robert Shiller at FT.com:

Many appear to think that the increasing complexity of financial products is the source of the world financial crisis. In response to it, many argue that regulators should actively discourage complexity.

The June 2009 US Treasury white paper seemed to say this. The paper said that a new consumer financial protection agency be “authorised to define standards for ‘plain vanilla’ products that are simpler and have straightforward pricing,” and “require all providers and intermediaries to offer these products prominently, alongside whatever other lawful products they choose to offer”.

The July 2009, HM Treasury white paper “Reforming Financial Markets” similarly advocated “improving access to simple, transparent products so that there is always an easy-to-understand option for consumers who are not looking for potentially complex or sophisticated products.”

They do have a point. Unnecessary complexity can be a problem that regulators should worry about, if the complexity is used to obfuscate and deceive, or if people do not have good advice on how to use them properly. Complexity was indeed used that way in this crisis by some banks who created special purpose vehicles (to evade bank capital requirements) and by some originators of complex mortgage securities (to fool the ratings agencies and ultimate investors).

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Economist Robert Shiller: “Homebuyers are a little optimistic about home prices”

2009-09-25T20:28:00.000-07:00

View article/video on the FrontDoor Real Estate Blog

Bubble, bubble, toil and financial trouble

2009-09-17T15:24:00.000-07:00

By Robert J. Shiller

THE widespread failure of economists to forecast the financial crisis that erupted in 2008 has much to do with faulty models. This lack of sound models meant that economic policy makers and central bankers received no warning of what was to come.

As George Akerlof and I argue in our recent book "Animal Spirits," the current financial crisis was driven by speculative bubbles in the housing market, the stock market, and energy and other commodities markets.

Bubbles are caused by feedback loops: rising speculative prices encourage optimism, which encourages more buying, and hence further speculative price increases - until the crash comes.

But you won't find the word "bubble" in most economics treatises or textbooks. Likewise, a search of working papers produced by central banks and economics departments in recent years yields few instances of "bubbles" even being mentioned.

Indeed, the idea that bubbles exist has become so disreputable in much of the economics and finance profession that bringing them up in an economics seminar is like bringing up astrology to a group of astronomers.

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They Called Him Mr. Bubble

2009-09-14T08:32:00.000-07:00

by David Leonhardt in Yale Alumni Magazine:

Sometime in the mid-1980s, Robert Shiller and John Campbell '84PhD created The Chart. It wasn't especially complicated. It showed average stock prices, relative to corporate earnings, going all the way back to the late nineteenth century. Wall Street analysts produce charts along these lines all the time. The measure is called the price-earnings ratio, and it is the single most common analytical yardstick of the stock market.

The yardstick that Shiller and Campbell created, however, came with a twist -- a twist that transformed their little chart into The Chart. Today, The Chart stands as one of the signature pieces of economic research of the past generation. It is rigorous enough to have appeared in the Journal of Portfolio Management and simple enough to be understood by those of us who are behind on our Portfolio Management reading.

Anyone who heeded the central lesson of Shiller and Campbell's analysis -- as well as the lesson of a subsequent chart, created by Shiller, on the housing market -- could have avoided some of the worst pain of the financial crisis. If Alan Greenspan had taken The Chart seriously during the late 1990s, Greenspan's reputation might be in better shape today. So might the United States economy. Nouriel Roubini, the doomsday-prophesizing finance professor at New York University who has lately become a media darling, credits The Chart for much of his clairvoyance.

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NY Times: An Echo Chamber of Boom and Bust

2009-08-29T20:38:00.000-07:00

by Robert J. Shiller

The global signs of a recovery in economic confidence seem puzzling.

It is a large and diverse world, after all, so why should confidence have rebounded so quickly in so many places? Government stimulus and bailout packages have generally not been big enough to have such a profound effect.

What happened? Economic analysts often turn to indicators like employment, housing starts or retail sales as causes of a recovery, when in fact they are merely symptoms. For a fuller explanation, look beyond the traditional economic links and think of the world economy as driven by social epidemics, contagion of ideas and huge feedback loops that gradually change world views. These social epidemics can travel as swiftly as swine flu: both spread from person to person and can reach every corner of the world in short order.

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Video: Reuters Interview

2009-08-27T20:54:00.000-07:00

Shiller unsure of housing's strength (view video)

The Case for Trills by Mark Kamstra and Robert Shiller

2009-08-12T08:53:00.000-07:00

Abstract: "We make the case for the U.S. government to issue a new security with a coupon tied to the United States’ current dollar GDP. This security might pay, for example, a coupon of one-trillionth of the GDP, and we propose the name "Trill" be used to refer to this new security. This new debt instrument should be of great interest to the Government for its stabilizing influence on the budget (as coupon payments fall in a recession with declining tax revenues) and for its yield, based on our valuation. Standard asset pricing analysis also suggests that Trills would enable important new portfolio diversification strategies and, in contrast to available assets that protect relative standards of living in retirement, Trills would have virtually no counterparty risk. We believe there would be a lively appetite for the Trill from institutional investors, public and private pension funds, as well as the individual investor. "

Read the full paper [pdf]

Read Noam Scheiber's take at the Stash blog

Video Highlights: Robert Shiller on Charlie Rose

2009-08-05T20:53:00.000-07:00

View full interview

Economic View: Financial Invention vs. Consumer Protection

2009-07-19T14:19:00.000-07:00

Robert J. Shiller in the New York Times:

JAMES WATT, who invented the first practical steam engine in 1765, worried that high-pressure steam could lead to major explosions. So he avoided high pressure and ended up with an inefficient engine.

It wasn’t until 1799 that Richard Trevithick, who apprenticed with an associate of Watt, created a high-pressure engine that opened a new age of steam-powered factories, railways and ships.

That is how innovation often proceeds — by learning from errors and hazards and gradually conquering problems through devices of increasing complexity and sophistication.

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Video: Robert Shiller Interview

2009-07-12T14:05:00.000-07:00

From Reuters:

Part 1/2

Part 2/2

Bob Shiller didn't kill the housing market

2009-07-12T13:53:00.000-07:00

From Fortune:

It's noon in New Haven, and Yale economist Robert Shiller and I are leaving his office to walk down the block for pizza. It was a damp morning, but now the sun is breaking through the clouds. "Do we need an umbrella?" he asks. I say I don't think so. But a few steps outside his office, he turns around to get one. "It's better to be safe," he says.

That's Bob Shiller for you. He's a worrier. Well, more than that. He's obsessed with taming risk. And that means all kinds of risk -- from the chance of stray showers to a danger that's on everyone's mind these days: falling home prices. Shiller's name will forever be linked with the worst housing bust since the Great Depression and the economic slump it caused. He first warned of a housing bubble back in 2003 when bankers were merrily minting mortgage-backed securities. And it is the widely cited gauge he helped create -- the S&P/Case-Shiller home-price index -- that has heralded, in grim monthly installments, the devastating collapse of the residential real estate market.

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Robert Shiller on Launching New Index

2009-07-03T17:19:00.000-07:00

View video