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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.

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?

“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.”

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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