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
Wednesday, December 30, 2009
Sunday, December 27, 2009
Economic View: A Way to Share in a Nation’s Growth
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.
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.
Saturday, November 21, 2009
Economic View: What if a Recovery Is All in Your Head?
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.
Read full commentary
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.
Read full commentary
Saturday, November 14, 2009
The Ghost in the Recovery Machine
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.
Read full commentary
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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Thursday, November 5, 2009
Yale Q6 Fall 2009 Q&A with Dr. Shiller
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.
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.
Sunday, October 11, 2009
A Bounce? Indeed. A Boom? Not Yet.
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
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
Wednesday, September 30, 2009
Q&A: Shiller Sees 5 Years of Stagnant Home Prices
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
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
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