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.

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Friday, January 22, 2010

Fixing the plumbing in banking system

By Robert J. Shiller at

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

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.

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