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
Sunday, March 14, 2010
Saturday, March 6, 2010
Economic View: Mom, Apple Pie and Mortgages
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.
Read full commentary
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.
Read full commentary
Wednesday, February 17, 2010
Can leaders revive animal spirits?
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.
Read full commentary
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.
Read full commentary
Saturday, January 30, 2010
Stuck in Neutral? Reset the Mood
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.
Friday, January 22, 2010
Fixing the plumbing in banking system
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.
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.
Monday, January 4, 2010
Continued housing volatility a sure bet
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
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
Wednesday, December 30, 2009
Why We'll Always Have More Money Than Sense
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
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
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