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Saturday, March 13, 2010

Robert Shiller on possible double-dip recession in USA

Yale University economist Robert Shiller is a perhaps America's pre-eminent academic expert on fluctuations in both the housing and stock markets. He was the first to warn explicitly of the looming subprime disaster in 2005.

Here, Prof Robert Shiller joins Australian Broadcasting Corporation (ABC) in an interview and commented on a possible double-dip recession in USA.

Transcript in full can be found here.


KERRY O'BRIEN, PRESENTER: It was the bursting of the American subprime housing bubble that triggered the Global Financial Crisis, and while the US is slowly climbing out of its worse slowdown since the Great Depression, with house prices edging tentatively upwards with the recovery, unemployment in America is still stuck at close to 10 per cent and some of the country's most credible economists are still refusing to rule out a slide back into recession. But while Australia these days is able to rely substantially on Asian markets, particularly China, to feed our ongoing resources boom, the fragility of America - and Europe, for that matter - are still capable of hurting the stronger economies.

Yale University economist Robert Shiller is a perhaps America's pre-eminent academic expert on fluctuations in both the housing and stock markets. He was the first to warn explicitly of the looming subprime disaster in 2005 and co-founded America's leading home price index. I spoke with Professor Shiller earlier today. He was in his Yale office.

Robert Shiller, how do you read the American economy right now?

PROF.ROBERT SHILLER, ECONOMIST & AUTHOR, YALE UNI: Well, we had a serious recession, the most serious since the Great Depression. Everything looks much better now, but there are still worries ahead and I think we might have a double dip. That means another recession, possibly.

KERRY O'BRIEN: So what's the risk of that happening?

PROF. ROBERT SHILLER: Right now, 90 per cent of the housing market is supported by the Government. And the Government is committed to withdrawing that support. Housing is an important component of our GDP. Confidence has come back, but it still remains at low levels, so we don't know that consumer confidence will support a lot of consumption and expenditure, and we don't know that investment expenditure will go at a high rate as long as this kind of economic uncertainty continues. And I also think that home prices, while they're rising, they may fall, because we have a huge overhang of homes that are likely to be foreclosed and be dumped on the market.

KERRY O'BRIEN: How vulnerable do the banks remain?

PROF. ROBERT SHILLER: Well, the banks have been bailed out by the Government. Things are coming along better. But if the mortgage crisis gets - if home prices decline, the banks will continue to see losses. Because the foreclosures will get worse if home prices decline again. There's been some resurgence of confidence. One thing that I've been saying in my recent book called 'Animal Spirits', that there is a fundamentally unpredictable component of human nature and human confidence, and right now it's coming back. So I don't know. I could see either scenario of a recovery or of a turnaround and bad times ahead.

KERRY O'BRIEN: But what happens when the stimulus package runs out because so much of the climb back has been based on that?

PROF. ROBERT SHILLER: Well that's one of the downers, one of the issues, because the stimulus package is becoming more and more controversial. Same thing that happened in the Great Depression. (Inaudible) about 1937-'38 when the economy fell into a recession again, Roosevelt was not able to get as big a stimulus package as he did earlier. People were starting to think, well, this wasn't working, we're still in the Depression, and they doubt that they want to see the national debt increased. Concerns about the national debt start to become more prominent and it makes it harder to do a stimulus package. And we might repeat that scenario.

KERRY O'BRIEN: Obama has obviously tried to restore confidence and a number of times now he's invoked Roosevelt's line of, "Nothing to fear save fear itself," but the magic of Obama does seem to have waned somewhat.

PROF. ROBERT SHILLER: Well, that's what happened to Presidents after they're elected: they turn out to be real people, and it's declined a little bit more than with other Presidents. There's also - I am troubled by the amount of anger in the United States, and the Tea Party movement has assumed amazing proportions. That's something that I couldn't have predicted. There's hostility toward the establishment in the United States right now. It's the kind of thing that goes along with massive unemployment and feeling that somehow the Government has failed us. And this sense of disappointment is part of my worry about the economy as well, because this kind of angry, disappointed, worried mood is not good for business.

KERRY O'BRIEN: Well unemployment is still hovering around 10 per cent, much worse in some important parts of the national economy like California. Can you see what's going to drive unemployment down in the near future?

PROF. ROBERT SHILLER: I don't know that it is gonna go down in the near future. Even in the past recessions, it's been slow to recover, and it seems that we are more damaged than usual. This was a crisis that distributed all of our major financial institutions and it left people wondering whether the too big to fail institutions, which are zombies in some cases, that are being kept alive by the Government, whether they are the future of this country. So it's not a good situation for long-term growth. And ultimately it's entrepreneurship, it's innovation that propels the normal growth that we have. We can't be living in an economy where it's difficult to innovate and expect to have even normal growth.

KERRY O'BRIEN: If America does fall back into recession and it happens relatively soon, one would imagine that could be quite crushing on the nation's psyche, really, in terms of confidence.

PROF. ROBERT SHILLER: Well, I don't like to do this. You're making me do a double dip scenario, 'cause it might not happen. We're kind of in a wishful thinking mode right now. I mean, because if I spell out a scenario, that's exactly the kind of thing that diminishes confidence and we're hoping to have confidence come back. On the other hand, I am a scholar and I don't shrink from telling what I think is a truth or what is a possibility. I mean, the scenario for me would be one in which financial markets decline and housing prices decline again. Home prices can decline again. It works like a feedback mechanism. It's kind of a social academic. Some kind of minor bad news starts prices down and then people see prices falling and there'll be (inaudible) talk and negative stories start to assume prominence. There might be some financial failures that are naturally caused by declining prices, and it just cycles downward. That's the thing: you know, you asked what would be the trigger? There is no clear trigger for any of the major financial crises. You talk about the Asian Financial Crisis, you talk about the Great Depression: there is no clear trigger for any of these things. It ultimately comes from people watching the markets, seeing the prices change and then changing their opinions, and then there's a contagion that drives the economy into a difficult period for a while.

KERRY O'BRIEN: Australia's housing downturn was relatively short-lived and we're now heating up again quite substantially in most cities. What's your instinctive reaction to that?

PROF. ROBERT SHILLER: I would imagine that it has bubble aspects to it. But, you know, maybe I shouldn't say; I'm a foreigner, I'm not ... I was recently in China and I got to talk to a lot of people. And I could smell and sniff a bubble there. What I mean by that is I could see that people's judgments were influenced by rising prices, and the rising prices were amplifying for them optimistic stories, and that's what happens in a bubble. We've seen this happen in the United States. I've been doing questionnaire surveys, and during the - in 2003, when our boom was going gangbusters, we were seeing 15 to 20 per cent expected returns for 10 years. People thought it's gonna go on forever. I know because we've done questionnaires and asked them. And it was a wild expectation. It was generated out of excitement from the real estate price increase. And we know that the cities where prices were going up more, there were stronger long-term expectations. These expectations were ultimately violated because the prices came down, but - so I don't think they were rational expectations; they were bubble expectations. And there's an easy tendency for this to happen again. So when I hear that in Australia prices are going out rapidly, I'm inclined to suspect that something similar to what has happened in China is happening. And I think that the Australians may well be deceived, just as we were in the United States, by the sense that prices never fall here. That Australia hasn't seen any significant drop of prices, that seems to mean, in a very intuitive way of thinking, that it can't happen here. But that's exactly what ultimately makes it happen.

KERRY O'BRIEN: Robert Shiller, thanks very much for talking with us.


KERRY O'BRIEN: Food for thought.

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