Interview With Robert Shiller

L.G.: That's not been a problem of yours, because you're not part of that particular group.

R.S.: I'm an academic, and academics have a tradition of standing up more. Even so, this groupthink happens even in academia. But I think that's actually something about my personality. I always think the opposite of people around me. My wife complains about that. She said, "You always have to take the other side." And I said, "But on the other hand...." My wife's name is Virginia, but I call her Ginny. She's a psychologist. 

L.G.: So you often take the opposite side of what she says.

R.S.: Right.

L.G.: Like that old Monty Python routine: "This isn't an argument. It's just a contradiction!"

R.S.: I imagine so, yeah. So what would that be? That's sort of an oppositional personality.

L.G.: But presumably you say these things because you have cause to believe them. You're not just being contrary. You actually did believe that there was going to be a bust and that there were too many subprime mortgages out there. But what's surprising to a layman like me, who knows nothing about this, was there were so few people who were willing to analyze that. And you were not only saying it-you were actually trying to get people to do something about it. And no one listened to you at the time.

R.S.: No, I think they started to listen. Everything happens with a lag through time. So for example, the O.C.C. [Office of the Comptroller of the Currency] did eventually issue guidance, but it took them a while.

L.G.: Now Alan Greenspan has been taking a lot of heat for his alleged role in all of this. And he recently tried to mount a sustained defense of himself. You probably saw that.

R.S.: I saw a Financial Times piece.

L.G.: Well, he's been doing it everywhere—I saw it in the Wall Street Journal. He's gone on a self-defense campaign.

R.S.: Yeah, that's probably a good thing for him to do because people thought he was a genius. He got out in 2006, which was almost exactly the peak. So he timed his departure right. But now he's out, and he didn't anticipate this. Even if you look at his autobiography, it's not there that he anticipated this crisis.

L.G.: So do you think he deserves some of the credit, or blame?

R.S.: Well, I actually think he's a very smart and well-meaning man, but I have differences of opinion and so I can't fault him for that. I don't think he was dishonest. I think he was calling it as he saw it. I guess as a Fed chairman, you do have a little bit of a bias toward optimism. Because if you say anything vaguely pessimistic, it gets you in trouble. In fact, the reason why the term irrational exuberance is famous—and people forget the reason for that—is because when he uttered the words, the stock market crashed almost immediately. He did this talk in the evening, and the U.S. markets were closed, but the Japanese markets were open—and they crashed immediately. So that was the news story at the time. He just utters the words irrational exuberance, and that just causes a cascade.

L.G.:  Just two words in a very long speech.

R.S.: Yeah, I told you about my experience yesterday [April 22]-a few words in my speech at the New Haven Lawn Club somehow got amplified. [In a breakfast talk that made doom-and-gloom headlines nationwide, Shiller warned that the housing market slump could be worse than the 30-percent price drop of the Depression, requiring bailouts for millions of homeowners. "I think there is a scenario that they could be down substantially more" than the historic slump of the Depression, Shiller was quoted as saying.]  They took from my speech that I was saying that the home-price declines could exceed those of the Depression. And that's it. That was the story. I don't even really remember what I said exactly, but it was a comparison I might've made in the course of making this presentation.

L.G.: It's known obviously that you have—coming up on two years—these housing futures. And you said when you started doing this that there'll be other instruments. So you're doing another one of those. We don't know what it is. You can't talk about it during a quiet period. But talk about what's already there. How's that doing?

R.S.: Well, we have a futures market. I have a chart of the open interest. It rose from nothing at the beginning to over a hundred million dollars, and we were very optimistic.

L.G.: How many trades did that represent?

R.S.: I don't have the numbers.

L.G: I saw something that initially it was like 2,000 some-odd trades.

R.S.: Well, each trade has a notional value of $60,000, and it seemed to me that generally the highest it got for a day was about 100 trades. So that would be $6 million—I'm not sure I remember that exactly right. So if you added up the total volume of trades, I thought it was something like $600 million.

L.G.: So the volume of the trades sort of slacked off a little bit?

R.S.: That's right. Because [the housing market] is in decline, yeah. I'm hopeful that it will come back.

L.G.: Right, but already you've bested the London FOX [the London International Financial Futures and Options Exchange, which offered property futures from May through October 1991.]

R.S.: That one ended totally in a few months [in a scandal involving the artificial manipulation of trades].

L.G.:  Have you ever considered scandal futures?

R.S.: [Laughs] No.

L.G.: Tell me, what do you call your futures?

R.S.: The Chicago Mercantile Exchange Housing Futures and Options.

L.G.: Tell me what function they serve.