What’s Ahead for Financial Markets? An Interview with Robert Shiller

Shiller argues that the change in attitude among the public that helped fuel the housing bubble hasn’t completely reverted. For generations, people saw homes not as appreciating assets, but necessities whose benefits weren’t measured chiefly by the delta between buying and selling price. But the housing bubble changed that mindset to one of speculation.

Shiller is famous for spotting both the internet bubble of the late 1990s and the housing bubble that triggered the 2008 financial crisis. While some may see a tendency for negativity in these calls, Shiller says he sees progress in financial markets in the long term. “I’m sometimes described as a bear when I look at financial markets,” he said. “But I’m not a bear overall for our economy. I think that financial capitalism is developing along a good trajectory.”

TRANSCRIPT

Q: What are the long-term prospects for the financial system?

Robert Shiller: Humans are very—or can be—so genius when they focus their attention on a concrete problem. So, we have a chess tournament, and we get people focused on how to play this game. The game has very specific rules, and it becomes a very concrete problem. But the problems that we face in life and the economy are nebulous, and they have so many different uncertainties about them. It’s not a very clear-cut game. And so, it’s hard to make progress.

But I think we do make progress, and I think that if you look at our financial institutions now, and our insurance—I include insurance as part of finance—they have really changed our lives. A hundred years ago, most people didn’t have any health insurance, and they didn’t have very good health care either. Now we have health insurance provided to most people, and we’ve got the new Obamacare, which is trying to extend it even further. People criticize this, but you have to take a big picture and look at how much progress we’ve made over a century, and it’s just enormous.

So I think it’s part of a broader trend where things will work out much better. You know, I’m sometimes described as a bear when I look at financial markets, but I’m not a bear overall for our economy. I think that financial capitalism is developing along a good trajectory.

Q: We appear to be in a period of multiple bubbles. Is this just a blip or the new normal?

Shiller: I’m not sure, however, that this is a moment in time, or whether it’s going to continue through the lifetimes of today’s young people. It could be. You know, we had a huge real estate bubble in the United States in Florida in the 1920s, and that really wasn’t repeated again. There was a 1940s—but that was more World War II related, and it wasn’t a true bubble. We didn’t really have another one until the 1970s, of the same magnitude. So I think it’s entirely plausible that we won’t have another really big real estate bubble for a half century. But I wouldn’t be too sure, because it sounds like we’re starting in on one right now with home prices going up in the United States.

Q: Do people approach housing differently now, and is this a cause for worry?

Shiller: The public has gotten much more speculative in its attitude toward housing. It used to be—50 years ago—you’d stop someone and say, “What are home prices doing?” They would say, “What?” They weren’t even reported in the newspaper. There was no interest in it. People just thought that home prices are probably basically stable, except in certain special places—you know, exotic or luxury markets. But now we’ve gotten very hyped to think about home price fluctuations. And not just in the United States. Many different places around the world have recently shown bubbles—or bubble-like phenomena. So I worry about it.

But on the other hand, I think that it’s probably not going to reach the level that it did the last time, because that was the biggest bubble that we’ve ever seen in U.S. history, and people must’ve learned some lessons from that. And in addition, we have tightening: Dodd-Frank Act put on new responsibilities for mortgage lenders, and we have new government rules and agencies that are supposed to help prevent this kind of thing.

Q: How can we make Social Security more equitable as well as more sustainable?

Shiller: Social security should be thought of as intergenerational risk management. Finance is a theory of risk management, and we have to ask how the generations will fare under various contingencies. One of them is that the internet revolution produces great inequality for our young people. Some of them are replaced by computers, and others find huge profit opportunities. We have to think about the baby boomers retiring and having a relatively small number of young people available. And the next generation is still being born, and we don’t know how many of them it will be. So, I think we have to go back to the drawing boards and think about what financial theory says about intergenerational risk sharing. That suggests to me, though, that there would be changes in our current system immediately.

One of the changes that I’ve been advocating is to change the indexation rule for Social Security payment. Now this sounds technical, but at the present time, Social Security payments are indexed to the consumer price index, which means that they’re guaranteed in real terms. So there is no risk borne by retired people. Of course, younger people—working people and their children—face risks. And, in fact, their risks are magnified by the fact that the government doesn’t want any risk placed upon the retired people.

I think that’s a wrong system. The risks should be shared by all generations. So, that’s a simple fix to make. Just change the indexation formula. If the right leader came up and said, as part of some other bill, perhaps, “Let’s just change the indexation formula from the consumer price index to some adjusted gross domestic product,” I don’t know that that would have great opposition in Congress. Why should it? You know, the voters won’t see it as representing any particular ideology that they oppose. It sounds kind of technical. So I think that it could happen.

Q: What is the danger of a society with high levels of inequality?

Shiller: Inequality generates resentment, and it generates a certain sense of the frivolity of our culture. If we live in a society that makes a small—less than one percent of the population—super rich, and we see their children living idly that our job is to entertain and indulge these children of the rich, it brings on bad feelings for our society. It’s stupid to do that. Why would you want to organize a society like that? If you went back to the original condition, as John Rawls said, we wouldn’t choose to have a society that makes a tenth of one percent billionaires and puts most of us in poverty—especially when you recognize that it’s just largely random who that happened to. So, it’s not just a moral qualm. It’s just something that—if we can think soberly as citizens—it’s just not something that we want, and it’s not something that the billionaires would want.