Continuous Workout Mortgages: Efficient Pricing and Systemic Implications

By Robert J. Shiller, Rafal M. Wojakowski, M. Shahid Ebrahim, and Mark B. Shackleton

This paper studies the Continuous Workout Mortgage (CWM), a two in one product: a fixed rate home loan coupled with negative equity insurance, to advocate its viability in mitigating financial fragility.

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Narrative Economics

This address considers the epidemiology of narratives relevant to economic fluctuations. The human brain has always been highly tuned towards narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing. Stories motivate and connect activities to deeply felt values and needs. Narratives “go viral” and spread far, even worldwide, with economic impact. The 1920-21 Depression, the Great Depression of the 1930s, the so-called “Great Recession” of 2007-9 and the contentious political-economic situation of today, are considered as the results of the popular narratives of their respective times. Though these narratives are deeply human phenomena that are difficult to study in a scientific manner, quantitative analysis may help us gain a better understanding of these epidemics in the future.

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Popular Attitudes Towards Markets and Democracy: Russia and United States Compared 25 Years Later

By Maxim Boycko and Robert J. Shiller

We repeat a survey we did in the waning days of the Soviet Union (Shiller, Boycko and Korobov, AER 1991) comparing attitudes towards free markets between Moscow and New York. Additional survey questions, from Gibson Duch and Tedin (J. Politics 1992) are added to compare attitudes towards democracy. Two comparisons are made: between countries, and through time, to explore the existence of international differences in allegiance to democratic free-market institutions, and the stability of these differences. While we find some differences in attitudes towards markets across countries and through time, we do not find most of the differences large or significant. Our evidence does not support a common view that the Russian personality is fundamentally illiberal or non-democratic.

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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.

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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)

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Reflections on Finance and the Good Society

After the financial crisis that began in 2007 many have expressed renewed doubts about the basic goodness of the financial sectors, doubts related to deeply-held moral principles and traditions of larger society. We need to reconcile these doubts with financial practice. We must acknowledge the important principle of reciprocity. We must understand that there are natural human tendencies towards aggression and hoarding, which no financial institutions and codes of ethics can completely eliminate. We must appreciate the important role of professional organizations in moderating these tendencies. When these principles are made part of financial education we can expect better public acceptance of the important role that finance plays in our society.

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Wealth Effects Revisited 1975-2012

By Karl E. Case, John M. Quigley and Robert J. Shiller

In our earlier version of this paper we found that households increase their spending when house prices rise, but we found no significant decrease in consumption when house prices fall. The results presented here with the extended data now show that declines in house prices stimulate large and significant decreases in household spending.

The elasticities implied by this work are large. An increase in real housing wealth comparable to the rise between 2001 and 2005 would, over the four years, push up household spending by a total of about 4.3%. A decrease in real housing wealth comparable to the crash which took place between 2005 and 2009 would lead to a drop of about 3.5%.

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What Have They Been Thinking? Home Buyer Behavior in Hot and Cold Markets

By Karl E. Case, Robert J. Shiller and Anne Thompson

Between the end of World War II and the year 2000, the U.S. housing market contributed much to the strength of the macro economy. It was a major source of jobs, produced consistently rising home equity, and served as perhaps the most significant channel to the real economy for monetary policy.

But starting with a drop in the S&P/Case–Shiller index for Boston in September of 2005 house prices began to fall in city after city. By the time it was over, home prices were down as much as 32% on a national basis, with many cities down by more than 50 percent, wiping nearly $7 trillion in equity off of the household balance sheet.

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Irving Fisher, Debt Deflation and Crises

It is the 100th anniversary of Irving Fisher’s 1911 book The Purchasing Power of Money. But, more important than that, it is a good time, during the current financial turmoil, to reconsider some of his theories again, in light of current events. And I think that some of his theories about variations in the purchasing power of money are very important today, have been underappreciated, and are worthy of considering anew.

In that 1911 book he described a theory of financial crises that tied them to over-borrowing during the expansion phase that preceded the crisis, and to the changes in the purchasing power of money that this expansion causes, then to the collapse in credit and the drop in the price level.

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Continuous Workout Mortgages

By Robert J. Shiller, Rafal M. Wojakowski, M. Shahid Ebrahim and Mark B. Shackleton

The ongoing crisis has exposed the vulnerability of the most sophisticated financial structures to systemic risk. This crisis—emanating from mortgage loans to borrowers with high credit risk—has devastated the capital base of financial intermediaries on both sides of the Atlantic. Its impact on the real sector of the economy has given rise to a fear and uncertainty not seen since the Great Depression of the 1930s.

The fragility of the financial intermediaries stems from the rigidity of the traditional mortgage contracts such as the Fixed Rate Mortgages (FRMs), Adjustable Rate Mortgages (ARMs) and their hybrids.

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Economists as Worldly Philosophers

By Robert J. Shiller and Virginia M. Shiller

In his influential 1953 book The Worldly Philosophers: The Lives, Times And Ideas Of The Great Economic Thinkers, Robert Heilbroner gave an inspirational account of what economists do, an account that was assigned as supplemental reading to countless beginning economics students over decades. Heilbroner wrote that he chose the term “worldly philosophers” because of the breadth and moral depth of economists’ inquiry. The appellation stuck, and for many years it was common to refer to economists as worldly philosophers. The inspiration of that book has contributed to the desire for many to go on to become economists, and to productive lives as researchers.

But, while the volume of research turned out by economists is most impressive, there are questions whether “worldly” and “philosophical” are represented as much as they should be in economic research. Has economics as a profession substantially lost sight of the idealism that existed in earlier decades? Has the strong impulse to pursue narrow specialization in order to propel research to the frontier led to some loss of moral perspective?

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