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Robert J. Shiller, the Cassandra of Capitalism
November/December 2008
by Kathrin Day Lassila ’81
I have a confession to make.
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I have reread Shiller’s article, with humility.
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In October 2007, I read a New York Times column by Robert J. Shiller. “The
economy is feeling a chill,” he wrote. “Is it descending into recession?”
Shiller is the Cassandra of capitalism, the Yale economist who suggested to
Alan Greenspan during the dot-com bubble that he tell the public the stock
market wasn’t behaving rationally. (A few days later, Greenspan made his famous
“irrational exuberance” remark.)
But in 2007, when I read the article, I thought, more
or less: Well, Shiller’s a well-known pessimist. Things will probably be just
fine.
So I have reread Shiller’s article, with humility.
“Most economists seem to be concluding that the current unpleasantness is a
false alarm,” he wrote. “But the narrative is still unfolding, and the extent
of its virulence is not yet known.”
If that sends a chill up your spine, you understand
why I am now a dedicated Shiller fan. I called him, seeking wisdom. No: he
didn’t say whether you should buy or sell. But he did discuss the urgent
questions of the hour.
1) How deep, and how wide? Could this become a Great
Depression?
“I’m optimistic it won’t,” Shiller said. But he went
on to list several points of disturbingly close correspondence. The market has
been down 50 percent; in the Depression it was 80 percent. (“We could get
there.”) The week of October 3 through 10 saw the biggest weekly market drop
since 1933. Interest rates have been at zero and were even, briefly, negative.
2) What should the next administration do?
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“We need a sort of new New Deal.” |
“We need a sort of new New Deal. We need to
democratize finance.” To Shiller, that means making finance work for ordinary
consumers. (Why is it the norm for financial firms to give customers
“information” that is incomprehensible?) He argues, “We should subsidize
financial advice. We have to make sure that people get the information, and it
has to be presented to them in a way that they can appreciate—one-on-one
advice. Second, we need regulation that protects consumers.” He backs Harvard
Law’s Elizabeth Warren in her call for a new agency, modeled on the Consumer
Products Safety Commission: a Financial Products Safety Commission.
3) The U.S. economy leaped from one bubble (dot-com)
to another (housing). Is there anything firm under our feet? Are the
fundamentals sound?
FDR, Shiller recounted, said in his 1933 inauguration
speech, “We are stricken by no plague of locusts.” Meaning: our crops have not
been ravaged nor real value destroyed; our economy is ultimately viable. “But
then he said that the only thing we have to fear is fear itself—stating what I
think is the correct interpretation of the Depression, that it was a crisis of
confidence. I think we’re in the same situation now. It is a problem with our confidence.
Unfortunately, it’s happening all over the world. So it’s very hard to manage.”
Let’s give FDR the last word. What he had to say in
1933 is food for thought as we contemplate the subprime mortgage catastrophe: “There must be an end to a conduct in banking and in business which too often
has given to a sacred trust the likeness of callous and selfish wrongdoing.
Small wonder that confidence languishes, for it thrives only on honesty, on
honor, on the sacredness of obligations, on faithful protection, on unselfish
performance; without them it cannot live.”
Readers respond
'96 warning
was nothing special
Although I am a
huge fan of Robert Shiller and his housing price data, anyone who dared to
ignore his 1996 warning on the stock market (with the S&P 500 around 740)
has done “just fine.”
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“Anyone who dared to ignore Robert Shiller has done just fine.” |
For almost the
entire period since the warning, stocks have been higher, often by as much as
100 percent (even as recently as late 2007). As I write this (mid-November
2008), the S&P 500 is still above the level of December 1996. While stocks
may fall below the late 1996 levels, an 11- or 12-year early warning is not
remarkable.
Jon Koplik '78
Bonita Springs,
FL
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