Creativity, Corporatism, and Crowds

NEW HAVEN – Economic growth, as we learned long ago from the works of economists like MIT’s Robert M. Solow, is largely driven by learning and innovation, not just saving and the accumulation of capital. Ultimately, economic progress depends on creativity. That is why fear of “secular stagnation” in today’s advanced economies has many wondering how creativity can be spurred.

Read more

When a Stock Market Theory Is Contagious

Since Sept. 18, the stock market has fallen more than 6 percent. An abrupt decline last week — after five years of gains — prompted fears that the market may have reached a major turning point.

Has a bear market begun? It’s a great question. The problem is that short-term market movements are extremely hard to forecast. But we live in the present and must try to understand what’s driving markets now, even if it’s much easier to predict their behavior over the long run.

Read more

Parallels to 1937

NEW HAVEN – The depression that followed the stock-market crash of 1929 took a turn for the worse eight years later, and recovery came only with the enormous economic stimulus provided by World War II, a conflict that cost more than 60 million lives. By the time recovery finally arrived, much of Europe and Asia lay in ruins.

Read more

The Mystery of Lofty Stock Market Elevations

The United States stock market looks very expensive right now. The CAPE ratio, a stock-price measure I helped develop — is hovering at a worrisome level.

I wrote with some concern about the high ratio in this space a little over a year ago, when it stood at around 23, far above its 20th-century average of 15.21. (CAPE stands for cyclically adjusted price-earnings.) Now it is above 25, a level that has been surpassed since 1881 in only three previous periods: the years clustered around 1929, 1999 and 2007. Major market drops followed those peaks.

Read more

Booming Until It Hurts?

NEW HAVEN – In recent months, concern has intensified among the world’s financial experts and news media that overheated asset markets – real estate, equities, and long-term bonds – could lead to a major correction and another economic crisis. The general public seems unbothered: Google Trends shows some pickup in the search term “stock market bubble,” but it is not at its peak 2007 levels, and “housing bubble” searches are relatively infrequent.

Read more

Donors Give More When They Have a Sense of Belonging

With the rise of behavioral economics, my profession is no longer so fixated on the theory that people are relentlessly selfish, striving only to maximize their own pleasure. We know, for example, that work is not just eight daily hours of suffering that people endure to make money for their own benefit. People actually like to work if they see meaning in it, and they can be generous with their money, too.

Read more

Robert Shiller Interview on Financial Markets

Gautam Tambay at SlideRule:

I had the recent privilege of speaking with Professor Shiller. I must admit to being a little intimidated before the conversation (it’s not every day that I spend 30 minutes speaking with a Nobel laureate), but my fears were quickly allayed by his warm conversational style. We chatted about the future of education, what causes financial bubbles, the pitfalls of specialization, and why it’s important that smart young grads go to work on Wall Street.

Read more

Inequality Disaster Prevention

NEW HAVEN – Thomas Piketty’s impressive and much-discussed book Capital in the Twenty-First Century has brought considerable attention to the problem of rising economic inequality. But it is not strong on solutions. As Piketty admits, his proposal – a progressive global tax on capital (or wealth) – “would require a very high and no doubt unrealistic level of international cooperation.”

Read more

Buying Insurance Against Climate Change

The third National Climate Assessment report — released on May 6 by the White House, and representing the work of more than 240 scientists — warns us about our hazardous future and offers many good ideas for dealing with it. But a most important point may be lost in the crowd.

Read more

Better Insurance Against Inequality

Paying taxes is rarely pleasant, but as April 15 approaches it’s worth remembering that our tax system is a progressive one and serves a little-noticed but crucial purpose: It mitigates some of the worst consequences of income inequality.

Read more

The Global Economy’s Tale Risks

TOKYO – Fluctuations in the world’s economies are largely due to the stories we hear and tell about them. These popular, emotionally relevant narratives sometimes inspire us to go out and spend, start businesses, build new factories and office buildings, and hire employees; at other times, they put fear in our hearts and impel us to sit tight, save our resources, curtail spending, and reduce risk. They either stimulate our “animal spirits” or muffle them.

Read more

In Search of a Stable Electronic Currency

Bitcoin, an experiment with a radically new kind of electronic money, has exhibited many of the characteristics of a speculative bubble. That was clear long before the collapse of the Bitcoin exchange Mt. Gox last week.

Read more

Speculative Asset Prices (Nobel Prize Lecture)

I will start this lecture with some general thoughts on the determinants of long-term asset prices such as stock prices or home prices: what, ultimately, drives these prices to change as they do from time to time and how can we interpret these changes? I will consider the discourse in the profession about the role of rationality in the formation of these prices and the growing trend towards behavioral finance and, more broadly, behavioral economics, the growing acceptance of the importance of alternative psychological, sociological, and epidemiological factors as affecting prices. I will focus on the statistical met hods that allow us to learn about the sources of price volatility in the stock market and the housing market, and evidence that has led to the behavioral finance revolution in financial thought in recent decades.

Read more

The Rationality Debate, Simmering in Stockholm

Are people really rational in their economic decision making? That question divides the economics profession today, and the divisions were evident at the Nobel Week events in Stockholm last month.

Read more

The Financial Fire Next Time

If we have learned anything since the global financial crisis peaked in 2008, it is that preventing another one is a tougher job than most people anticipated. Not only does effective crisis prevention require overhauling our financial institutions through creative application of the principles of good finance; it also requires that politicians and their constituents have a shared understanding of these principles.

Read more

Why Is Housing Finance Still Stuck in Such a Primitive Stage?

The institutions for financing owner-occupied housing have not progressed as they should, and the financial innovation that has followed the financial crisis of 2007-9 has not been focused on improving the risk management of individual homeowners. This paper lists a number of barriers to housing finance innovation, and in light of these barriers, the problems of some major innovations of the past and future: self-amortizing mortgages, price-level adjusted mortgages (PLAMs), shared appreciation mortgages (SAMs), housing partnerships, and continuous workout mortgages (CWMs)

Read more