Interview With Robert Shiller

Robert Shiller

Image: Michael Nagle

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Eight years ago, when he predicted a looming bust in the stock-market bubble in Irrational Exuberance, his bestselling book, Barron's magazine called Yale economist Robert Shiller "the new Dr. Doom." The nickname still applies as Shiller muses that the steep slide in housing prices—with the collateral damage on Wall Street—could end up exceeding that of the Great Depression.

Since blurting out his scary scenario last week at the New Haven Lawn Club—in a speech that prompted gloomy headlines around the country—the professor has been trying to sooth shattered nerves (including those of his business partners, who are trying to get the Securities and Exchange Commission to sign off on a new financial instrument to join Shiller's two-year-old housing futures on the Chicago Mercantile Exchange).
         
The 62-year-old Shiller has been an academic superstar for years, largely because of the Standard & Poor's/Case-Shiller home price indexes, which he developed with Wellesley College economist Karl Case as the nation's most authoritative source on housing price trends. But when Portfolio.com caught up with him in Manhattan for an exclusive interview last week, Shiller was chastened and cautious, noting that he better not make any more predictions during the S.E.C.'s required "quiet period" before the registration of the new instrument.
  
"I don't even really remember what I said exactly," he protested. "I always think the opposite of people around me," he added. "That's sort of an oppositional personality."

Lloyd Grove: How did you get into this line of work?
 
Robert Shiller: You mean property derivatives?
 
L.G: No, I mean how did you become interested in economics and being a market theorist?
 
R.S.: Well, I think I'm a polymath. I'm interested in everything. When I was a senior in college at the University of Michigan, I was dazzled by the choice set that we had. Young people, you can do whatever you want, and I was disappointed that I had to choose one, realistically. You like to be a renaissance man and do everything. I took long walks trying to decide whether I wanted to be a physicist or a medical doctor or a sociologist, whatever-a scientist, an astronomer.
 
L.G.: Did you grow up in Michigan?
 
R.S.: I grew up in Michigan. My father was an engineer in Detroit, and we moved to the suburbs, Southfield, when I was 13. Actually, I'm a product of the auto industry in the important sense that in 1914, Henry Ford—I don't know if you know this history—he announced that he was paying $5 a day for assembly-line workers, which was twice the going rate. This was a very bizarre thing for him to do, and it got a deluge of applicants. So one of my grandparents was living in Gardner, Massachusetts, working in a stove shop, and my other grandfather was a tailor, operating in Chicago. And they both responded and came to the same River Rouge plant, and both took the jobs. If they hadn't converged in Detroit, my parents never would have met, and I would not exist. So it turns out that Henry Ford—it was really kind of a dumb thing—is responsible for my being here. He was a little bit of a loose cannon, but he was saved by inflation. Because World War I came right after that, and he never had to cut back. Otherwise, he couldn't have afforded to pay those salaries, as my understanding of history goes.

L.G.: Right, and $5 a day—that's big money.
 
R.S.: It was twice what my grandfather was making in Gardner, selling stoves. So the auto industry has always been in our family, except my father worked for an industrial-oven company that sold ovens that did things like bake the paint enamel on the car body.
 
L.G.:  Is there any hope for the American auto industry?

R.S.: Maybe in the long run, they will prevail. I know they're having hard times now. And they're a manufacturing industry, and they did have a labor-cost disadvantage as compared with other countries. That may not be insurmountable. But in the long run, in these other countries, I'm hopeful that their wage costs will go up too. So maybe American ingenuity will prevail in the end. 
 
L.G.: You were among the first people who were warning about a crash in the housing market.
 
R.S.: Right. In 2003, I published a Brookings [Institution] paper with Case, which was titled with the question "Is There a Bubble in the Housing Market?" [in Brookings Papers on Economic Activity 2: 2003]. He's the same guy who worked with me on the Case-Shiller indexes. We had been doing a survey on home buyers, to try to assess their attitudes. In 2003, we noted in our paper that people had very high expectations for future home-price appreciation. We thought then that it might help explain the boom that was emerging. If people were having high expectations, then maybe they're willing to pay more for houses. But we didn't reach a conclusion-well, it was all carefully worded back then. We thought that there might be a bubble.

L.G.: Back in 1996, at a lunch meeting with Alan Greenspan, you warned about a stock-market bubble. And then a few days later, he used the words "irrational exuberance," which became the title of a book of yours. By 2005, you were already sounding the alarm about housing.
 
R.S.: Right. You can see that in the book Irrational Exuberance, in the second edition, in 2005, I raised the possibility of there being a major crisis.

L.G.: And that was ahead of a lot of people, obviously.
 
R.S.: It was.
 
L.G.: So then you had meetings with various quasi-government entities—Freddie Mac and Fannie Mae. What did you tell them?
 
R.S.: That they should be hedging their portfolio risks for the possibility of a decline in home prices. We just never really got their attention. We told them they had a portfolio that was heavily exposed to real estate risk and that it would be sensible for them to take hedging positions that would offset that risk, especially given their public G.S.E. [government-sponsored enterprise] status. The government officially disavows any guarantee to Fannie and Freddie. However, their debt tends to have a lower yield than other corporates. And people believe that they will be bailed out if there's ever a problem. So we were arguing that they have an obligation to the public to manage their risks.

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