Glimpses of Shiller, Through the Years

OCTOBER 15, 2013, 6:00 AM

Glimpses of Shiller, Through the Years

By DAVID LEONHARDT

Robert Shiller struggled mightily to choose a major when he was a college student at the University of Michigan in the 1960s. He took so many long walks around Ann Arbor trying to decide among the academic fields that intrigued him – economics, journalism, law and others – that he eventually injured his foot and had to see a doctor. Almost 50 years later, with Mr. Shiller among the three Nobel laureates in economics announced Monday, his wandering academic eye helps to explain his success. Far more than most economists, he has borrowed from other fields, especially history and psychology, to do research with obvious relevance for everyday life.He is the economist who twice in the past 20 years tried to sound the alarm that the American economy was suffering through a dangerous bubble. He personally warned Alan Greenspan, then the Federal Reserve chairman, about a stock-market bubble in 1996 – and briefly influenced Mr. Greenspan to worry publicly about “irrational exuberance.”

A decade ago, when many investors and analysts were saying home prices never fall, Mr. Shiller said that they were more likely to fall 40 percent and cause a recession than to continue rising. Nouriel Roubini, the New York University finance professor whose own housing warnings made him famous, credits Mr. Shiller’s work for shaping his views.

Boiled down, Mr. Shiller’s central insight is that people make mistakes – and they tend to make the same mistakes over and over.

I have profiled Mr. Shiller three times over the last 12 years, once in 2001 (when the dot-com crash was still young), once in 2005 (near the peak of the housing market) and once in 2009 (during the financial crisis). Excerpts from those profiles follow.

From a Sept. 2, 2001, article in The New York Times, focusing on the friendship between Mr. Shiller and Jeremy J. Siegel, a University of Pennsylvania economist who was more bullish about stocks:

The two have become intellectual combatants, offering conflicting advice to Alan Greenspan and making frequent television appearances. Several magazines have portrayed them as dueling wise men, with Mr. Shiller saying the stock market is facing years of little if any growth and Mr. Siegel arguing that it remains the best investment around. One recent article went so far as to pose the question directly: Who is correct, Mr. Shiller or Mr. Siegel?

But behind all the apparent disagreement is a 34-year-old friendship that both men say has been the driving force for their most important work. In an academic world that rewards specialization above all else, they have pushed each other to make connections between the abstract theories of their field and the real-life events of their society.

“We become devil’s advocates of each other,” Mr. Siegel said.

Mr. Shiller added: “Nothing is independent between us.” …

Mr. Shiller, a Yale professor who looks a decade younger than he is, will sometimes interrupt himself to offer a caveat to one of his own ideas. Rather than watching stock tickers, he will sometimes open an encyclopedia and start reading, according to his son Ben, 19. The man who worries about irrational exuberance does not gamble.

“Shiller is very earnest,” said Paul A. Samuelson, the Nobel winner who taught him at M.I.T. “He is almost — and I don’t say this in a pejorative way at all — like a hayseed boy off a farm with a straw in his mouth. He’s a long-jawed, serious fellow.” …

Mr. Shiller, befitting his more cautious personality, found his process of discovery considerably more painful. He had grown up in a suburb of Detroit, where his father was a mechanical engineer. When the time came to pick an undergraduate major at the University of Michigan, he found himself tortured by the idea of choosing a career. On the one hand, he knew he should pick one path and follow it, so as not to waste effort. On the other hand, there were so many possibilities.

“It was very hard — as a young person, it’s dazzling to think about all the different things you could do,” he said. “There are a million different occupations. You can only do one thing in life, you have only one career, and you’ll never know” whether you made the right choice.

To make the decision among economics, science, journalism and law, he would leave his dormitory room and take long walks around Ann Arbor. “And then my foot started to hurt and so I went to a doctor and he said, ‘This is the kind of injury we see in soldiers on forced marches.’ ”

Ultimately, Mr. Shiller chose economics, he said, because he thought it would allow him to work on the important problems of society, like poverty and starvation. “This is where I snapped finally,” he said.

From an Aug. 21, 2005, article in The Times, headlined “Be Warned: Mr. Bubble’s Worried Again”:

Today, nine years after his lunch with Mr. Greenspan and five years after the markets finally did crash, Mr. Shiller is sounding the same warning for real estate that he did for stocks. In speeches, in television and radio interviews and in a second edition of his prophetic 2000 book, “Irrational Exuberance,” he is arguing that the housing craze is another bubble destined to end badly, just as every other real-estate boom on record has.

These, in short, are his second 15 minutes of gloom. He predicts that prices could fall 40 percent in inflation-adjusted terms over the next generation and that the end of the bubble will probably cause a recession at some point.

Despite being a boyish-looking 59-year-old academic economist with a halting speaking manner, he has become the bugaboo of the multibillion-dollar real-estate industry. Its executives, like many Wall Street economists, say that low interest rates and a growing population will keep house prices rising, even if future increases are smaller than recent ones. On Monday, the National Association of Realtors reported that the median home price climbed to $208,500 in the second quarter, up 14 percent from a year earlier.

“Shiller is predicting the mountain goes into the sea,” Robert I. Toll, the chief executive of Toll Brothers, a home builder, said in a recent interview, without having been asked about the economist. “He’s selling himself.”

To Mr. Shiller, though, it is a question of history, not salesmanship. Most people have never looked at decades and decades of home prices, because such data have been almost impossible to find. Stock-market charts often go back almost a century. Housing charts typically start sometime in the distant decade of the 1970’s.

But Mr. Shiller has unearthed some rare historical housing data for other countries. Using old classified advertisements, he was then able to fashion a chart for the United States that goes back to the 19th century.

It all points to an unavoidable truth, he says. Every housing boom of the last few centuries has been followed by decades in which home values fell relative to inflation. Over the long term, the portion of income that families spend on their shelter stays about the same.

Builders become more efficient, as they are doing today. Places that were once sleepy hinterlands, like the counties south of San Francisco or a patch of desert in southern Nevada, turn into bustling centers that take pressure off prices elsewhere. Even now, the United States remains a mostly empty nation.

“This is the biggest boom we’ve ever had,” said Mr. Shiller, who bought into the boom himself in 2002, with a vacation home near one of Connecticut’s Thimble Islands. “So a very plausible scenario is that home-price increases continue for a couple more years, and then we might have a recession and they continue down into negative territory and languish for a decade.

“It doesn’t even attract that much attention,” he continued. “There will be many people thinking it was a soft landing even though prices may have gone down in real terms by 40 percent.”

From the Sept./Oct. 2009 issue of the Yale Alumni Magazine:

What’s striking, in retrospect, is just how radical a position this was at the time. By the summer of 2005, even Shiller’s famous stock market prediction was no longer looking quite so smart. The Standard & Poor 500 had rallied sharply from its lows in the wake of the dot-com crash. Shiller had predicted in 2001, as the crash was happening, that the market might fail to keep pace with inflation over the coming decade. Instead, it began rising in 2002 (on its way to a new, much-hyped record high in 2007). Yet here, in 2005, was Shiller — who has been called both Mr. Bubble and Dr. Doom — publicly forecasting another cataclysm.

Wall Street cheerleaders were only too happy to point out his spotty record as an investment adviser for the masses. By 2005, stock prices were twice as high as they had been when Greenspan gave his “irrational exuberance” speech. And the real estate- industrial complex — real estate agents, mortgage brokers, home builders, and the like — was similarly dismissive. During an interview I did in 2005 with Robert I. Toll, the chief executive of Toll Brothers, a large, high-end home builder, he brought up Shiller’s name without my having asked. “Shiller is predicting the mountain goes into the sea,” Toll said. “He’s selling himself.”

Even many of us who found Shiller’s dispassionate, history-based analysis to be persuasive had trouble going quite so far as he did. I had had my own little revelatory experience with The Chart when first reading “Irrational Exuberance” in 2001. (I remember where I was: sitting on a sofa in my Manhattan apartment one sleepless night.) Later, Shiller’s research on real estate helped persuade me the country was in the midst of a real estate bubble that was destined to burst. I wrote articles in the New York Times suggesting as much and advising people to consider renting a home, instead of owning it, until prices came down. At a high school reunion in 2005, a classmate who was a real estate agent asked me to please stop.

Still, these articles typically included a caveat that softened the message: even if house prices in some areas began to fall at some point, most economists thought that the declines were not likely to cause a recession. After all, as Greenspan liked to remind people who worried about the existence of a housing bubble, house prices nationwide had not fallen since the Great Depression. Shiller himself also couched his message carefully. He always specified that a long-term stagnation, in which prices fail to keep pace with inflation, might be the most likely outcome.

But the implications were still serious. Housing had become an enormous part of the American economy. If it were in the midst of a bubble — “the biggest boom we’ve ever had,” as he said in 2005 — it was going to create big problems. Roubini, the N.Y.U. economist, was one of those people who grasped this. He had long been a pessimist, but Shiller’s housing chart persuaded him to ratchet up his pessimism to a new level, he has told David Ignatius, a Washington Post columnist. Like Shiller, Roubini ended up sounding like an extremist. When he delivered his forecast at an International Monetary Fund meeting in 2006, “he sounded like a madman,” as one economist told The New York Times Magazine.

We know how the story ends. House prices have indeed fallen across the nation. In some cities, like Miami and Las Vegas, they have fallen a stunning 50 percent. The stock of Toll Brothers has fallen more than 60 percent from its high. The housing bust has helped to cause not merely a recession, but the worst recession in at least a generation and the worst financial crisis since the Great Depression.

And that stock market rally that followed the dot-com crash? It too has ended with a crash. In mid-August, the S.&P. 500 was trading at slightly more than half of its 2000 peak, adjusted for inflation. Thirteen years after Shiller had lunch with Greenspan — a period in which the economy and corporate earnings have both grown substantially faster than inflation — stock prices, in real terms, are right back where they were.