Speculative Prices, Inflation, and Behavioral Economics

Speculative Prices, Inflation, and Behavioral Economics

– It’s my great privilege
and honor to welcome you to the first inaugural
Paul Volcker Lecture. This is a great occasion for us. It’s a great opportunity to highlight some of the exciting work that’s happening here
at Syracuse University in the Maxwell School, but also to pay tribute to the many people who have helped make
this occasion possible. I’m the introducer of the introducers, but I first want to
welcome the Chancellor. Thank you for being here with us. To my fellow Dean and so many other distinguished members of
the Syracuse community, but in particular to a very special guest
who is with us today, which is Paul Volcker himself. Paul, thank you so much. (audience applauding) Needless to say, Paul
needs no introduction, but I think it’s important to just note the great contribution that Paul has made not only to the economic
health and prosperity of this country and the
international community, but also his great commitment to public service and
public administration, something that we here at Maxwell are particularly grateful for. And Paul’s service as a member of our Advisory Board for many years, he’s been a great friend and counselor to so many of us and my predecessors and that makes it especially
a great honor for us to have him here and to have
a lecture named after him. But I also want to pay tribute to somebody who was unable to join us today, although he very much wanted to be here, which is Bob Menschel. Bob Menschel, an
extraordinary philanthropist, a great citizen who’s
contributed in so many ways to his country, but especially
to Syracuse University, through his time and his generosity and his commitment to the school, who was the person who
created the Paul Volcker Chair and this wonderful program
that we’re having today. This Chair, which is the Paul Volcker Chair
in Behavioral Economics, really reflects Bob’s own
personal interest and commitment to this very important and emerging field. And, although he can’t be with us, I get a chance to promote his own work which is a real reflection of
Bob’s interest in this area. It’s a book he himself wrote called Markets, Mobs, and Mayhem, which I heartily recommend to all of you which really is a very insightful example of the very kinds of
issues and perspective that the Volcker Chair was
designed to help us explore both from a research and
a teaching perspective. And it really is a
long-term passion of Bob, as somebody who’s had to
deal a lot with markets and the economy over a long-term, in his very extraordinary career that he’s not only shared his wisdom from his own experience about that, but also helped support the
work that we’re doing here through the Volcker Chair. And so my final duty here,
although it’s a privilege, is to introduce the introducer of our very distinguished
speaker Bob Shiller, who you’ll hear a great
deal more about shortly, but to introduce the first
holder of the Paul Volcker Chair, our own Len Burman. Len, as many of you know, has
been associated with Maxwell in a variety of ways. He is currently the first
holder of the Volcker Chair and working both with us and
with his responsibilities at the Tax Policy Institute
in Washington, DC. But before being the holder
of the Volcker Chair, he held the Moynihan Chair here, which is another one of the great honorees and great alums of this institution. Len is a, I think, an
especially appropriate holder of the Paul Volcker Chair
for a number of reasons, not least of which because of Len’s really
remarkable career of service both as a thinker and writer and teacher, but also as a public servant. And throughout his
career, both as his time at the Treasury Department
and working with Congress as well as his time as
teacher here at Maxwell, he really exemplifies the kinds of values that Bob wanted to honor
with the Volcker Chair and which Paul himself really
reflects in his own career. And Len’s ability to take the insights of his own research and writing and apply them to the
pressing issues of our day really reflect what we very
much hope to see in the work that we do here at Maxwell
and at Syracuse University and through the Volcker Chair. We are very honored that Len has agreed to play this role for the university. He’s played an active
role both here on campus and through our expanded
efforts in Washington. And I’m now delighted
to turn the podium over to the first Paul Volcker
Professor Chair, Len Burman. (audience applauding) – Thank you, Jim. I really appreciate that introduction. I wasn’t expecting it. The big, the real reason we’re
here, of course, is to host the first Paul Volcker Lecture
in Behavioral Economics here at the Maxwell School
at Syracuse University. It’s an enormous pleasure for me to introduce my friend Bob Shiller and I think I can say
without understatement that he’s the best person on the planet to be kicking off a symposium series on behavioral economics. Bob is a 2013 Nobel Laureate
in Economics Sciences. He’s the co-organizer of NBER workshops on behavioral finance with Richard Thaler and on behavioral macroeconomics
with George Akerlof. He’s a best-selling author, which is unusual among economists. (audience laughing) He is the Sterling Professor of Economics at the Cowles Foundation
for Research in Economics and a Professor of Finance and Fellow at the
International Center of Finance that’s at Yale University. He’s the author of numerous
books and scholarly articles covering a breathtaking range of subjects. Irrational Exuberance diagnosed
the internet tech bubble before it burst and convinced
me to sell my stock portfolio months before that happened, so I will always be in
his debt, literally. (audience laughing) The second edition predicted the collapse of the real estate bubble, which was when I moved into a tent, (audience laughing)
and I think everyone is going to be reading the new
third edition very carefully. He is co-creator with Carl Case of the Case-Shiller
Index of US house prices. In addition to Irrational Exuberance, Shiller’s books include
The Subprime Solution: How the Global Financial Crisis Happened, and What to Do About It; Macro Markets: Creating Institutions for Managing Society’s
Largest Economic Risks; Finance and the Good Society; The New Financial Order:
Risk in the 21st Century; and Animal Spirits: How Human
Psychology Drives the Economy, and Why it Matters for Global Capitalism, a book he wrote with George Akerlof and which I assigned to several classes and which my students loved. He’s a regular contributor to the New York Times Economic View column and to Project Syndicate, and
a frequent media commentator on economic and business issues. Beginning in 2016, he will serve as the President of the
American Economic Association. He’s also the busiest person I know, which is why I’m especially
grateful that he was willing to fit time into his frenetic schedule to speak with us today. Please join me in welcoming the inaugural Paul Volcker
Lecturer in Behavioral Economics, Nobel Laureate, Professor Bob Shiller. (audience applauding) – Great. Thank you. Can we get my slides up? I’m lost without my slides. You’ll see me, right (laughs). So I’m deeply honored to be the inaugural Paul Volcker Lecturer. I’m very please to see a program. I assume this will continue for 50 years? – Forever.
– Forever? (audience laughing) And I believe in behavioral economics. It’s something I’ve been
involved with, now, for decades and I believe in Paul Volcker, too, who is sitting right here
(audience laughing) and (laughs)… So, I thought I would start by saying something about Paul Volcker and, but I don’t,
(audience laughing) and I’m trying to understand the, as I understand, Paul
Volcker has never published a research paper in behavioral economics. But I see a connection between
him and behavioral economics. Behavioral economics, now, incidentally, I’m not opposed to conventional economics. (audience laughing) I think that behavioral
economics is another step that brings us closer to reality. But behavioral economics
takes into account a broader perspective on human behavior from other social sciences as
well as traditional economics. So I think of movement
toward behavioral economics as a movement toward
realism and relevance. In fact, I think that
mathematical economists should thank us for what we’re doing. In fact, it’s transforming
mathematical economics because we’re bringing
in elements of reality. The traditional mathematical
economics represented people as data processors who
had a utility function that they consistently
followed and optimized. And that was a useful episode in the history of economic thought. It, I admire it, but it
just needs to move on and that’s what we’re doing. So Paul Volcker, all right,
you know, Paul Volcker has been a very effective person. And part of it is I think
of him as a realist, who wants to take the world as it is and not make, constrain
it to fit our models. Also, Paul Volcker is
unusually moral person, I believe that’s, and I somehow connect behavioral
economics with morality. I’m sorry if that makes me
kind of a zealot of a sort. Why is behavioral economics moral? Well, part of it is that
at least it recognizes a moral side to human behavior. Traditional economics has people as relentlessly pursuing
their self interest. But, you know, it’s not that bad. It would depress me horribly
if that’s the way people were. People can do off things. Le’s not say that it’s not, but there is a good side of people and that’s part of what
behavioral economics represent. So why do I say Paul
Volcker epitomizes moral, well it’s, he comes
across as a moral person? I’m thinking of things he agreed to do, that after retirement as
Chairman of the Federal Reserve. So, for example, he headed
the Volcker Commission which investigated Swiss banks’ treatment of the deposits of Jewish
victims of the Holocaust. He also headed up, or the United Nations asked him to head up a commission that would study corruption in the Iraqi
Oil for Food Program. So, you know, lots of people
who retired from, well, you were on Chase Manhattan
Bank once, too, a banker. After retirement, you
know, you get a phone call from the United Nations,
would you head up this thing? They might say no, right? But some people have a
different perspective. Oh, I should also, at
this point, thank again the donor for this lecture series whom I have not met, Robert Menschel, who, well, you just saw the book here called Markets, Mobs and Mayhem. He was, you showed this, yeah, he was Executive Director
of Goldman Sachs. Goldman Sachs has fallen on hard times in terms of reputation, but I think we have to remember that there were good people
at Goldman Sachs as well (audience laughing)
who would do things like endow this lecture series. And the topic of that book is parallel to what I’m going to be talking about. So, what I want to talk
about is price changes, price movements either in
inflation or speculative markets. Underlying this is a economic idea that hasn’t always been emphasized, the idea that our decisions
in life are driven by our expectations for the future. Most decision, important
decisions you make depend on what you think will happen not just today, but tomorrow and next year and, by the way, 10 years from now. Oh, and, by the way, 30 years from now. And I think probably for many of you, a hundred years from now
because a lot of your, if you think about your
motivations for what you do, it’s partly because you have children or you will have children and
you’re worried about them. What horizon, if you’re
worried about your children, that’s at least a hundred
years in the future, or your grandchildren maybe. And so, what do, how do we represent what people do with those? Well, there was a very
important revolution in economic theory a half century ago that rational expectations and efficient markets theory developed because economists didn’t know what to do about these expectations. What do we assume? How do people form their expectations? So the economics profession fell in love, it’s kind of a fad in the profession, I was in it too, but I have to admit, I did my dissertation,
PhD dissertation on it, on rational expectations. So we can build beautiful
mathematical models of what people would do if they were optimal
forecasters of everything. But I didn’t really believe that. I had to get my PhD dissertation done and on the job market and get a job, but I eventually wrote
papers dismissing it. So that’s–
(audience laughing) But, although, not completely,
I have to say it’s, you know, reading earlier
doctrine, economic thought, is still a useful thing. And I actually went
back, just the other day, I pulled out my doctoral dissertation for the first time and decades (laughs) and I thought, you know, I
did have some good ideas here, so self-congratulating, but
it was basically misguided, but at least I had some good ideas. So the idea is that,
somehow, our expectations feed into price behavior. And so this is a plot of, the blue line is the
long-term interest rate for the years since the early 1950s. It’s the 10-year Treasury rate. And, before that, it’s
the approximation to that. And the red line is the inflation rate. Now, it’s actually a 10-year
annualized inflation rate to make it fairly smooth. I wanted to show this plot first because it gives you some idea of the significance of Paul Volcker because let’s look at the inflation rate. Paul Volcker was appointed
by President Jimmy Carter to be Fed Chairman and took
office in August of 1979. He was reappointed. Carter was a Democrat, as you may know. He was reappointed by the
Republican Ronald Reagan in the early ’80s, so
he was a Fed Chairman like Alan Greenspan or Janet
Yellen or Ben Bernanke later. And look what happened during
his tenure as Fed Chairman. Let’s look at the inflation
rate, the red line. Inflation had been building
since the early 1960s and reached an incredibly high
level, almost double digits. Now, I’m giving you a
10-year inflation rate. Actually, on a monthly basis, it got up to something like 15%, (audience member whistling)
so, annualized. And so then, Paul Volcker came in and introduced new policies and the inflation rate has
been declining ever since. That’s 35 years of decline, so
I call this the Volcker peak. This is interest rate, so the long-term interest
rate in the early 1980s, right after Volcker took the
Chairmanship, was over 15%. Can you imagine buying a house then? The mortgage rate was like
18%, so can you imagine? You buy a, let’s say a $100,000
house, back then, right, you’re gonna be paying
$18,000 a year interest. It’s kind of, how did people do that? You know, it was really something. Well, they lived in a
different world then. And Paul Volcker fixed it
(laughs), that’s where I’m, but he, that’s a pretty hard thing to fix. The story then was, there
was a wage price spiral, I’ll get back to that, that
was driving expectations then. This is another plot
that, it’s the same plot, but I’ve added one more series onto it and the yellow or the gold
line is the gold price, and I’ve got it real,
inflation-corrected gold price. Now, Paul Volcker plays a very
important role in this, too, because until 1971, we
had a fixed exchange rate between the gold and the
dollar; it was $35 an ounce. This is real. The reason the real
price of gold is falling over this interval is
because we had inflation, so, but it was fixed at $35. Until Paul Volcker was in the US, Undersecretary of Treasury
under Nixon and they cut, they severed the tie
between gold and the dollar. But then, secondly, look at this. He became Fed Chairman August, 1979, and look what gold prices did. They like tripled in a matter of months, so something strange was
going on at that time. There’s been only one other peak like that and that, here, is 2011 during,
after the financial crisis. So I just think we have to reflect on how historically
important Volcker has been in major events in the financial markets. But I want to talk more generally about prices and their movement. So this is another price. The blue line, here, is the
price of the stock market. It’s the real Standard & Poor
Composite Stock Price Index from 1871 to last week, when I did this chart. And the green line is
corporate earnings per share. So you can see that there
have been a small number of episodes that look troublesome. The most note, let’s start, the first troublesome episode is this. The stock market bottoms out in 1921 and had this huge upward
market peaking in 1929. Any of you heard of this story? (audience laughing) And then, it lost 85% of its value and then we had the Great Depression which it didn’t get back
up to the 1920 value until, what, in 1960 or so. Then the next big event like that is here, this huge event from 1982 to 2000. And here is another one from 2003 to 2007, and here is a third one
from 2009 to the present. So it kind of looks
like these rare events, these big stock price moves and the huge crashes in the stock market, but maybe they’re getting
more common, right, because you see three
of them in a row, here, in the last 15 years and there aren’t that
many of them in history. I’m kind of wondering
what drives these things and I would have to say that
there is no agreement on it, so I’m going to give you my thoughts, and that’s what my book was about. How do I? This is home prices. I wrote about this in the
second edition of my book and I produced a hundred-year-long, or more than a
hundred-year-long price series for home prices and I’m
looking at the price of an unchanging home, to the best I can. Houses have gotten better
and bigger since 1890. Most of those terrible
houses have been torn down and they’re gone anyway, so
you don’t know how bad it was. People used to live in crowded
conditions in little houses, but this is for a fixed-size house. It just shows the
investment value of a house. And, underneath, I’ve
got, this is from my book, I have building costs,
the cost of construction. This is the population
of the United States and this, down here, is the
long-term interest rate. Same series that I showed you before. And what, well, two things jump out. When I published this in 2005, there was no such series
anywhere in the world. I couldn’t understand. Why isn’t anyone interested in what a hundred-year-long
price history has been? I took that as a lesson in academia. Academics are herd behavior people, (laughs) like others.
(audience laughing) They do the same. And why don’t they do a price index? Well, I asked some of my colleagues. Well, the reason is
obvious, fairly obvious. First of all, real estate
is low-prestige in academia. I don’t know why, but
it’s that way, so it is. And, secondly, you just
don’t get ahead in academia by doing price indexes, but I just did it anyway. It got me a lot of attention
(audience laughing) because the first thing it showed is that home prices haven’t
gone up between 1890, well, just a little bit
between 1890 and 1990. So, you know, people had the impression that home prices always go up. Don’t they? That’s what people said. All right, I presented this and
I thought I would get a big, I did get a big protest, but nobody ever gave me
data to protest this. So they just, we thought
everybody knows that. If the population is growing
and the economy is growing, how could it not be true? Well, it isn’t true and the
reason it isn’t, I can tell you, it’s not so hard to see,
homes go out of style and people want the new thing. They wear out. You know, the roof gets damaged
and you get water damage and then it looks bad and you think, let’s just tear the whole thing down. And that’s what happens. So they don’t predictably do well, there. And then there was this huge boom here. What caused that? So this, by the way, is
Japanese home prices, just to give you a comparison. There was a huge, the red
line is for Tokyo, Osaka, and a few other large cities; the blue line is for all of Japan. Home prices were just
going up and up and up, until the early 1990s,
and then they collapsed. And they’re still down. When I was talking to a reporter
from Nikkei the other day, and she said, “Well, they’re
going up in Japan, now,” so she wanted me to, so I said, “Let me get the data and look. “Okay, they’re going up but not very much.”
(audience laughing) They’re trying to see a glimmer of hope. So why do these things happen? And that’s the subject of my talk today. So, oh, there’s, by the way, a nice book that came out recently about Paul Volcker by William Silber. It’s a big, a 600-page book. I don’t know what you think of it, but I thought it was as nice book and it quotes you on various things. One thing is, the book documents it, it’s a whole story of Paul
Volcker’s effort to convince, in order to make these
changes in the world economy, he had to convince people. And I think it was a moral authority that he that he showed
that helped that happen. And the effect of Paul Volcker is not confined to the United States because, everywhere in the world, I don’t know about everywhere, just about everywhere in
the world, inflation is down and interest rates are down
and something has happened. It was a stunningly important revolution. One thing that Volcker
said, according to Silber, I’m quoting Sibler quoting Volcker. He said, “If we tighten money
and raise interest rates, “it’s going to bring
long-term rates down, not up, “because it will break the
cycle of expectations.” He quotes it. I don’t know if he got, this is right. I’m just quoting the quote. Referring to rational expectations, that, according to Volcker, “Something that those crazy economists “in Minnesota came up with.” So there was a sense of reality here. Actually, I taught at the
University of Minnesota for two years
(audience laughing) and I had great admiration
for my colleagues, although I had some
friction with them, too. But so, it, in the early, in the late 1970’s, inflation had emerged as the most serious
problem facing America, the biggest problem. So the Gallup Poll reported that and I’ve had my own surveys. My surveys compare
individuals with economists. So I stuff mailboxes in
economics departments and I got professors’ responses. The public thinks very different than professors of economics. So the question I had, do you think that preventing inflation, this is in 1996, so even later, but is as important as
preventing drug abuse or preventing deterioration
in the quality of our schools? 52% of the US, random-sample
Americans fully agreed, and you add the sort of
agreeing, it’s an 84%. Economists never thought
it was such a big problem. We have a different view of it. And then I found out
why people think that. It’s because they think that their, my own salary isn’t going to go up. Prices are going to go up
and I’m going to get poorer. So which of the following
causes comes closer to your biggest gripe about inflation? Inflation causes a lot of inconveniences, or, inflation hurts my real buying power. It makes me poorer. So the general public, 77% picked two. Economists don’t believe,
only 12% picked that. (audience laughing) So I think that there’s a public misunderstanding about inflation. If there’s a lot of inflation, you know, your wage will go up, too. It’s like everything goes up. The public doesn’t think like that. One reason why Paul Volcker
is so much admired is people think, I’m sorry,
this is a wrong reason, but they think that you made them rich. And so, by cutting inflation, and now they’re twice as well-off as they would have been
without it, though. But, anyway, I was going to
talk, you’ve mentioned my, I’ve written a book called
Irrational Exuberance. The first edition came out in 2000. The title of my book came from a speech made by a successor to
Volcker, Alan Greenspan, referring to craziness
in the stock market. So, in my first edition, in
2000, I started naming booms. We name hurricanes. The United Nations has something called the World
Meteorological Association that names all the hurricanes, but nobody names the
bubbles in the markets. I thought I’d better
give them my own names. So I called the bubble that I showed you, the biggest bubble from 1982 to 2000, I called that the Millennium Boom because it peaked at the
beginning of the new millennium. I don’t know if you remember this, the Dow Jones Industrial Average
peaked in January of 2000. Now, it only comes once
every thousand years that we can celebrate a new millennium, so don’t expect to do it again. It had this sense of great significance, but, of course, it’s totally meaningless. This is the way people are. This is behavioral economics. It’s just because where they
chose to start our years from, and now we reached the 2000 mark. But it had every effect, real effect, in the sense that all the
news media were talking. And do you remember? Some of you might have
not been too old then, but you probably all remember that the news media were
talking about the future in expansive terms in 1999. And I think it caused a
great sense of excitement and a hangover after the party was over and the markets fell something like 40%. It just can’t be a coincidence that it’s January of 2000
that the market peaked, so I thought a good name for that boom is the Millennium Boom. And the second edition,
I came out in 2007, I’m sorry, in 2005, in the
midst of a real estate boom. That’s when I added the
chapter on home prices. I called that the, I’ve
decided to call that the Ownership Society Boom after a theme of the 2004
Bush presidential campaign. It’s a long-standing theory, but one that he chose to
emphasize in his campaign, that capitalism thrives on ownership, that people are more responsible when they own the, whatever’s involved. If it’s, you know, if I’m tending a garden and I know it’s my garden, I’ll be more careful than if I’m asked, well, you should help out
tending the public gardens. I mean, it’s the fact that
I’ve got to eat this food, it makes me more careful. And so that meant that George W. Bush was applauding price increases in homes and the higher increasing
home ownership rate and anyone who wanted to make
a subprime loan was a hero. You’re bringing more people
in the home ownership. It turned out badly. A lot of these people lost their homes. But, back then, Ownership
Society sounded golden, so I called it that. The latest boom, right now, since 2015, is hardest to describe. It seems a little, you know,
it doesn’t seem so exciting as it did in 1999, so I
call it the New Normal Boom. I didn’t coin the word New Normal. It was Bill Gross of Pimco, referring to a kind of
disappointing situation with very low interest rates that that might go on
for a long, long time, where we just don’t have prosperity. And I’m going to argue that that can cause a boom in the financial markets. So the theory of my book about bubbles, the speculative bubbles,
there’s two aspects to it. One is precipitating factors and the other is amplification mechanisms. Now, this can be used to apply both to consumer price index bubbles and to speculative asset bubbles. The precipitating factors are
what got something started, and it’s usually
unsatisfying to discuss them because there’s so many of them. I’m trying to talk like
a sociologist here. I don’t mean to be
disparaging of sociologists, although economists often are and I end up being their advocate. But society changes and the ideas that are
floating around change. Stories, there is a
literature in psychology about the narrative
basis for human thinking. The human brain is very
responsive to stories, narratives, not just numbers or statistics. Like, a newspaper, when you
take a job a at newspaper and you’re writing up a story
on the unemployment rate, your editor will tell you, if
you ever take a job like that, you gotta put human interest in it. Don’t just write a story that
the unemployment rate is 10%. Find anybody who’s unemployed. Let them complain to you. Put those in there. They’ll say, oh, it’s tough. You know, I feel so ashamed of myself. I don’t mean to make light of this; I’m making light of this style of writing. And then, people like
that and they remember it. But it’s also a naive theory that spread, and I’ll come back to this. Then, bubbles are amplified by feedback. When prices are going up,
people act differently and that can cause the
prices to go up more. Also, when prices in the stock market, let’s say, are going up, that can cause people to
spend more, so GDP goes up. And people think, I was
right, things are better, so they go even more and bid
up the stock market even more. Or there’s price to corporate
earnings to price feedback. That is, when the stock price goes up, then people spend more, so
companies make more profits. And then people say, see, I
was right, it’s a great time. So they bid up the price again. And then it happens again
and again, for a while, and that’s the idea of
a speculative bubble. It’s something like a
naturally-occurring Ponzi scheme, which I discuss in the book. So I thought I would start by
just giving you some evidence about the amplification mechanism. So this is something I
put in the third edition. This is a plot from the third edition. I didn’t have all these
data in the early editions. What, I’ve been doing
questionnaire surveys of individual investors since the 19, well, this theory goes back to 1996. And the question that
I ask a random sample of high-income Americans is, do you agree with the following statement, the stock market is the best investment for long-term holders who can buy and hold through the ups and downs of the market? Now, I didn’t make that statement up. I’d heard it so many times by 1996, a lot of the times on ads
for financial services. And it seemed to me like it was a fad, like everybody’s saying this. Now, it turns out you can
trace people who said this 30 or 50 or 70 years
ago, but not so often. I think it was the rising
market in the ’90s that made, it just seemed like, yes, obviously, the stock market is great. So I, here’s what I found,
that in the year 2000, 97% agreement with that statement. Now, I find this astonishing because, and I teach finance. I never say that one thing is
always the best investment. It’s just not the way
financial theory works. People have to hold everything
and if everyone’s rational, then everything is a good
invest, you should diversify. Look at that agreement. And then when the stock market
peaked in 2000 and came down, so did agreement with that statement. Now, this isn’t people
extrapolating the decline because the statement was about, very general, about all times. So when the market was going down, people lost their faith in the
stock market for all times. And then it started picking
up again after 2003, and so did belief in this statement. So, it’s not a perfect fit, but
you can see what I’m saying. When the market goes up,
people think it always goes up. I mean, that sounds so stupid. But, I mean, I don’t mean
to say people are stupid. I’m saying they don’t,
(audience laughing) this isn’t their homework
to figure this all out, and they’re just answering this. These are gut reactions
that people are giving me. But I think the gut reactions
affect what they do. So here’s another statement. The questionnaire statement
was approximately, if the stock market
were to crash tomorrow, I’m sure it will be back
up in a short order. So, don’t worry about crashing. Now, they come and go, I’m elaborating, but, you know, on the
long-run, it always goes up. So I got pretty good agreement
in 1999, 90%, almost 90%. And then, as the market disappointed, it was gradually crashing. It sort of moves up and
down with the market, too. Well, this just shows confidence in the valuation of the market. In 2000, only 30% of the US population thought the market wasn’t overvalued. It’s a sign of a bubble. Everyone thought the
market was overvalued. Not everyone, 70% thought
it was overvalued. It’s coming down again, now, in 2014 for individual investors. And finally, I did the
same thing for home prices. So this is, the question was, do you agree with the following statement, an investment in real estate
is the best investment for a long-term holder
who can just buy and hold through the ups and downs of the market? Now, this was given to recent home buyers. So there’s something called cognitive dissonance in psychology. If you just bought a home, you’re not going to disagree
with this statement. So it’s not everyone,
but among homebuyers, I find the same general thing. When home prices were going
up, agreement was high. And as home prices fell, agreement fell. So this is a sign, to me, of
feedback and it’s not rational. I’m not negative about people. I know there was this MIT economist who said, voters are stupid. That was a big mistake. I’ve never said anything like that. I’m stupid; I make these mistakes. We all make these mistakes
because you can’t focus your attention all the time on everything. And when you come, you know, you’re busy with a million things and you’ve got to make
some investment decision, these kinds of mistakes
happen to everyone. So the behavioral finance
revolution brought in a lot of new ideas about how people think, actually old ideas, but
they’re new to economists. So, in 1893, the sociologist
Emile Durkheim said that there’s a collective consciousness that invades human thinking
at any point of time. The Germans called zeitgeist,
spirit of the times, and that you ‘re a prisoner to it. You can’t think, you
couldn’t possibly go back, if I could have asked
you to do an 1893 act and answer questions the way someone in 1893 would answer them, you couldn’t do it because
you’ve not experienced the 18, they had a whole different climate then. Maurice Halbwachs was
another French sociologist in the 1920s who said that the problem is that people have what’s, he
called, a collective memory. And that is, most of what you know today, you’re gonna forget in a
(laughs), in a short time. You don’t, unbelievably fast
how fast you forget things. The only things you remember are things that people keep reminding you of, so if people keep talking
about something or other, you’ll remember it. And then, when you make a decision, you are, you have this thought, I’m going to think carefully,
here, about everything I know. And you’ve often failed to reflect that the facts that you bring
to mind are the same facts that come to the minds of other people, and they’re not the facts that would have come to mind
20 years ago, or 30 years ago. Selective attention, well this goes, all these things go way back. William James wrote a
book, a textbook, in 1890 called Principles of Psychology and he had a chapter on attention and, oh, pointing out that
people are very capricious in the way they pay attention to things. And you tend to pay attention to what everybody else
is paying attention to, so you’re going to make the
same mistakes as everybody else. And then, the news media reinforced this because the news media, if you
ever worked for a newspaper, you know you want to get a
story that will resonate. You know, today, the
newspapers now publish the most popular story today. You’re a cub reporter? Boy, if you can get onto the
most popular story today, your prestige in the
establishment goes way up. So they try to amplify whatever people are paying attention to. Whatever you’re, people are interested in, that’s the news today. So, now, these behaviors tend to create a sort of epidemic effect in our thinking. So, now, epidemiology, it
becomes relevant to economics. Well, neuroeconomics is
another new emerging trend, based on neuroscience and brain research. So now, I want to just
talk more concretely about the precipitating factors that caused some of these big movements. So I wanted to go back
to the gold price peak that I showed you in 1980 and what led to the Volcker Peak in both gold and the consumer
price index inflation. So things were talked about then that you don’t remember now, probably. Maybe some of you remember
because, OK, I should have asked for a show of hands, but I won’t. In 1972, the Club of Rome published a book called Limits to Growth and it was like a weather forecasting
model of the world economy and it was done by, what
was his name, Jay at MIT? What? – [Audience Member] Forrester. – Jay Forrester, right. He was an electrical engineer who invented the Random Access Memory for
computers, so certified genius, and he was heading up this
project which predicted that the population of the
word was growing so fast that there would be famines,
there wouldn’t be enough food. We had a big, oh, I didn’t mention this. We had a big farmland boom, right then. Everyone was buying farms. If we thought we were
going to be all starving, you wanted to own a farm. And then, oh, that’s when the Chinese one-child policy was launched. So everyone was worried
about population for a while. I think that was tied in. The wage-price spiral
began to be, you know what, you ever heard that term? It’s disappeared, more
or less, but the idea is everyone expects inflation to continue, and so that means when you negotiated with your boss for a wage,
or the unions negotiated, they’re going to demand this thing, because, otherwise, I’m
gonna be left behind. We know there’s going to be inflation. Inflation’s running at 15% a
year, so I want a 17% raise. And this gives Paul Volcker a problem when he tries to tighten the economy because all these people are
going to demand the wages whether there’s inflation or not. And so, you’re going to
have a huge recession if you try to fight that. Then you had oil crises in ’73 and ’79 due to wars in the Middle East. The Hunt Brothers, anyone remember this? Nelson, you remember it. – [Audience Member] We were taking X-rays and taking the silver out of the X-rays and putting them in bags. My partner–
– You were doing that? – [Audience Member] My partner did. He had it in his desk, and that was before.
– OK. Yeah, so the Hunt Brothers
had this fraudulent scheme. It was to push the price of silver up and they would make a billion dollars. It was a, and they were caught and exposed and it ended badly for the Hunt Brothers. They lost a billion
dollars trying to do it, trying to manipulate the market, but I think that had an
effect on the gold price. But I think, also, Paul
Volcker had an effect. So let me talk about the Millennium Boom. These are factors that I give in my book. What drove that? Well, I’ve got a dozen
here, so I won’t talk, but just quickly, the internet came in. It gave us a sense of the future. Triumphalism, the Soviet Union broke up and China became capitalist, so we thought capitalism is wonderful. Business success, people were
flocking the MBA programs. Republican Congress, which was promising to cut capital gains taxes, so don’t sell your stocks now. Wait until after they cut the taxes. The Baby Boom was talked about a lot. The newspapers were
covering business much more. Analysts were notably
suffering from grade inflation. They had three grades: buy, hold, or sell. But this time, nobody
was ever saying sell. It’s just like that
nobody gave D’s anymore, or hardly anyone gives D’s anymore. 401K plans came in, retirement plans, that urged people to buy stocks. Mutual funds was a huge fad. In 1980, there was like one mutual fund for every two families. You know, the average family
had a half of a mutual fund and it was up like eight
or 10 mutual funds. I don’t remember the numbers exactly. Inflation was way down. Volume of trade was way
up and gambling was up. Do you remember, back then,
in 19, and nobody gambled. There weren’t any casinos
and there wasn’t lotteries, but it all came in and this,
it’s a whole different culture. Then, what about the
Ownership Society Boom? What drove that? Well, that was a short boom and not as dramatic as the other, but I think the Ownership
Society theory itself drove the thinking at the time. The Greenspan put was the perception that Alan Greenspan would never allow the stock market to drop, not for long. Because in 1987, when there
was as big crash beginning, Greenspan stepped in aggressively
and prevented it from, and the market came back up and it wasn’t a long-run disaster. We lost our Republican Congress. Deng Xiaoping and Boris Yeltsin died and we got Vladimir Putin in his place. So we didn’t feel quite
so triumphant after that. (audience laughing) And then the New Normal Boom, now, this is the most delicate one of all. I find it hard to understand. That’s the one we’re in now. What’s driving it? Well, part of it is the end
of the depression-scare. The financial crisis brought in a scare that we might be in
another Great Depression. Also, under Bernanke, we saw
very loose monetary policy, bringing interest rates down to, short-term interest rates, down to zero. And we had the three quantitative easings. But then, I’d like to
mention a couple others. I was just talking to a
reporter yesterday about it. This isn’t common. He said, “Nobody else says this,” so this is unique to my,
pretty much unique to my, to connect this to asset pricing. So I’m going out on a little limb here, but here’s what I’m talking about. I think that since this
boom started, say, in 2009, the appearance of rapid technical progress has been unusually dramatic. So what’s happened since 2009? First of all, we now have mobile
phones that you can talk to and I’ve started doing, maybe many of you have started doing this, when I was lost in New York yesterday, I just pulled out my thing and said, OK, Google, where am I? (audience laughing)
OK? And then a map flashed up and it showed me exactly where I am. So, do you know what I mean? Those sorts of things are happening now. And the computer revolution
has always been scary. In fact, it even precedes computer. It goes back to the Luddites, remember, in 1811 had a big protest
against mechanization that was replacing their jobs. And we’ve been receiving
reassurances for 200 years that you have nothing to worry about, that computers create as many jobs, or automation, as they lose. But I think we’re getting
a little edgy about this because it just looks scary
that things are happening. You know, you’re getting an,
some of you here are students and you’re getting an education, but Wikipedia is getting an education a million times faster
than you are (laughs) and nobody needs to ask you anymore. You just go on the, well,
I’m saying, this is the fear. You go on the web. So I think people have an anxiety about what’s happening to me
as an individual in the future and not just next year. So I look at this thing I have, my cell phone in my pocket, here, and what’s it going to
be like in 30 years? The Economist magazine has a cover story, maybe it’s in their
current issue, it said, by 2020, 80% of the world population will be carrying a
super-computer in their pocket. All right, so what does this mean for me? I just did a test. I was in New York yesterday. I got in a cab, it was a random cab. I like to do this because the cab drivers
are often talkative. And I asked him, do you have kids? And he said, “Yeah I have a daughter, 12, “and a boy who’s 16.” And I said, what do you think their life will be like in 30 years? Well, what kind of job will they have? And I didn’t prompt him. You know, he didn’t know
he didn’t know who I was. He just launched off on, “I have no idea what they’re
going to be doing in 30 years. “I’m worried about them. “What kind of career will they have?” It seems like the internet,
in the last 5 years, is producing a lot of low-pay jobs. Like you have Uber which
doesn’t pay as well as an ordinary taxi-cabbing job. And lots of people are getting them. And we have Airbnb. Right, now, you can take your room and rent it out to tourists,
(audience laughing) but it, they’re are exciting, but they’re exciting for some people, for Zuckerburg, OK, who set up Facebook. He’s fabulously rich. But, for me, for the typical person, it means driving my car
and using the web to find, do you see what I’m saying? I think this is the mood of the time and it’s highlighted by
this fear of inequality. And now, Thomas Piketty’s
book was a huge best-seller the last year, or was it? Now, it’s maybe two years, pointing out that the top
1% is getting very rich and other people are
just not moving forward. So I think this driving, I’m
sort of coming to an end. So it’s driving, well,
you know, the thing is, I, the theme in my book is that this fear of
technology and inequality is among the precipitating factors that’s driving markets up now. So here’s the story. Everybody’s worried about the future. They think, I’ve got to
have something solid. I’m going to try to save more and I’m gonna put it somewhere. The problem is so many
people want to save more that there aren’t productive investments. The private sector can’t think of enough, so interest rates hit zero and they still don’t want your money. People just bid up the
price of existing assets and it makes the economy slow
because they’re not spending. So we have a paradox of high
asset prices and weak economy. So this is a measure of the price, this is the price-earnings
ratio as I calculated it. I call it CAPE, Cyclically
Adjusted Price Earnings ratio, and I have it shown since 1881. The blue line is a measure of how expensive the stock market is. And you can see that it
was very expensive in 1929, very expensive in 2000, expensive in 2007, and pretty expensive right now, for kind of different reasons. But in all these cases,
people were willing to spend a lot of money on investments that maybe looked overpriced. So we’ve found, my work with my former
student John Campbell, that the CAPE ratio predicts
long-horizon return, 10-year returns on the stock market. So the horizontal axis
shows the CAPE ratio. I’ve got a point for
every month since 1883. And then they, on the vertical axis, I have the subsequent
annualized 10-year total return. So when CAPE is high, the
market tends to do poorly. So we’re, right now,
at a CAPE of around 27, so those are the historical returns. They range from plus, what, 7% to minus 4% for the next 10 years, so maybe that’s a guess
as to what we can expect from the stock market, now, nothing great. It’s kind of highly-priced. It’s not super highly-priced
like it was in 1929 or 2000, but highly-priced. The other thing is interest rates are low all over the world, now, and some of my, all of those precipitating
factors I gave you for the New Normal Boom
are really worldwide. The technology is a
fear that everybody is, everybody in the world is
seeing this new technology and wondering what place
they’ll have in it. This shows really interest rates, inflation-indexed bond yields for four countries since the mid-1980s: the UK, Australia, Chile, and the USA. And you can all see that they’re, they’ve been going down
at least since 2000 and they’ve reached negative
levels, see, even in the US. This is the 30-year TIPS
for the United States and it reached negative returns in 2012. It’s up now, but it’s up
to something like 3/4, 2/3 of a percentage point. It’s still negative. Last time, when did this chart in the UK, so this is what’s happening. People are willing to accept,
to lock up their money, for, that’s the 20-year UK guild. They’re doing that right now,
or just recently, in the UK, locking up their money for 20 years and saying, you don’t have
to pay all of it back to me. I’ll be happy to take less than all of it. (audience chuckling) And that’s because that’s the
best they think they can get and they want to save, so. This was the lead story in the New York Times last
July and it struck me. Neil Irwin is a hot young
writer for the New York Times, so he got the, I’ve never met him, but he got the opportunity to write the headline story
for the day on the front page and the story was From Stocks to Farmland,
All’s Booming or Bubbling. So and he said it’s worldwide. Worldwide, more money
is piling into savings than businesses believe they can use to make productive investments. So, now, I was a little
bit troubled with his story because he didn’t show
quantitative evidence that was solidly supported;
it was more anecdotal. But I wanted to look at
some of the evidence. This is the CAPE price-earnings ratio for Japan, emerging
countries, the European Union, the US, and the world and you can see that it’s
not highest everywhere. Japan is way below what they were. Their price-earnings ratios
were up, almost at 100. By the way, that foretold
very badly for Japan. This was not an investment opportunity to buy Japan’s stocks in the late 1980s. So it’s not like it’s
obvious that they’re all up, but, you know, US is high, Japan is high. Maybe the world is a
little on the high side, but not extraordinarily, so I think Irwin might have
been overstating it a bit. This is the International Monetary Fund Real World Home Price Index. I’m just going to draw your
attention to this series here which is world home prices. And so they look like they’re
higher than they’ve been, not as high as they were
in the peak of the market, but, OK, so maybe everything is expensive, although Neil Irwin
may have overstated it. There’s also fears today of a crash, of everything, an everything crash. Now, I’m not saying this. I’m quoting other people,
although I’d say it’s on my mind. If everything’s expensive,
maybe everything will come down. So here’s a website which I don’t particularly
mean to recommend, but I’m saying I found this on there, called zerohedge.com and this was 10 days, this was, no, today’s the
18th, right, no, 19th. Nine days ago, they
predicted a bond market crash in six days. Well, thankfully, it didn’t happen. (audience chuckling) One of the lessons in finance is you never make a six-day
forecast like that. (audience laughing) But this was timed for the FOMC meeting that came out yesterday
and nothing much happened. I’m saying that people are,
there is this fear of this, but I can reassure you a little bit. There has never been a
sharp bond market crash like the stock market crash. This is the global financial data, has taken the Moody’s total
return Long-Term Bond Index and extrapolated it back to 1857, that’s 1857, over 150 years ago. And this is what you would have, if you invested your money in
bonds and kept long-term bonds and kept corporate bonds and kept reinvesting them for 150 years, then an investment of
$1 would be worth, now, what is that, over $10,000. That’s actually not
very much for 150 years, so it wasn’t the most
spectacular investment, but the thing I’m pointing out
about it, it’s never crashed. Except, the closest, well, you might say, it’s, here is Paul Volcker again (laughs). (audience laughing) The only time it came
close to crashing was when Paul Volcker did
his economic miracle, but the total decline was not very much, so I’m not particularly worried about a sudden crash in the bond market. So, I’ll close just with a quote from a Paul Volcker speech in 1982, reflecting his thoughts on, and I’ll open it up for questions. I hope you don’t mind me quoting you. These were–
– This is it. – You apparently said (laughs), no this isn’t from the book, Paul Volcker. This is from, there’s
a library on the site of your speeches and you were speaking before some business group in 1982. I’m sorry, I’m not trying
to create trouble for you. (audience laughing) I thought it was an interesting quote because I think it’s accurate,
describing the economy as, “Like walking through a
fun house at the carnival.” That’s where they have
these curved mirrors and you see distortion, but
people have distorted beliefs and it’s, “reflected back on reality.” That’s the feedback that
I’ve been talking about. So, my apologies if I’ve
misrepresented your views. – [Paul] Sounds good. (audience laughing) – OK, so I’ll just open this up there. (audience applauding)
Thank you. – Thank you.
– All right. Should I, ah? – For those who are in our virtual rooms, you can tweet us your
questions at #VolckerSymposium, or there are index cards
and pens in the room for you to write your questions and we’ll get them up
here to the auditorium and I’ll let you take some questions. A question, back there. – Hey, thanks for coming, Mr. Volcker, I didn’t even know you were coming. You stepped in the door and I heard, I saw you on The Inside Job,
this morning in my class and they told me you were tall. I didn’t think you were this tall, so– (audience laughing) Mr. Shiller, one of the things,
you know, we were looking at in my economics class was
what happened in 2008, was essentially the average American or the average human was taking
on more debt than they could and now they’re saying that
it’s a government problem. Like we see places like Greece
and other places in Europe where governments are taking a lot of debt to pretty much try to sustain this growth. Where do you think the next
asset bubble’s going be? Because it’s rarely that
it’s in the same asset class for two rooms and busts in a row. Thank you. – You want to know where the
next asset bubble will be? I find that difficult. You want me to give you
advice how to invest into it? (audience laughing) – [Audience Member] I
know, it doesn’t have to be a six-day forecast. – That’s the one thing that’s
really hard to do, yeah, so there isn’t a real exact
science of predicting it. It seems like mental
categories change, that people, all right, let’s talk
about a housing bubble. It’s a societal change. So one thing I did is to
look through old newspapers. Now they’re all on the web. You know, you can just
read any, pick a date. You go to ProQuest or something
like that and you can read, or LexisNexis, you can
read old newspapers. And I search housing bubble. Let’s go back to the
19th century, all right? Search for a housing bubble. Zero, not there at all. But if you, they didn’t use that word, so you have to try to get
back to, then I did find it. Yeah there was, there were housing bubbles
in the 19th century. There was one in Manhattan
and I found a nice story from a New York newspaper
saying, you know know what? We’re running of land in Manhattan. (audience laughing) And then they said, it’s hard to find any
building in Manhattan that’s less than six
stories tall, today, so. But see, that was a bubble because I think they were exaggerating
how fast it would happen because New York has probably, Manhattan has probably been growing one percentage point
faster than other cities. That’s not spectacular. You know, it’s not that
thrilling, on average, over all these years. It can’t be much more than that because, compounded
over hundreds of years, that would be outrageous, so
it’s not, that’s all it is. And then, there was a beautiful
bubble in Los Angeles, beautiful I say, wonderful reporting from the Los Angeles
Times in the mid-1880s. And you can go and read this if you want, but lots of people, they
just completed a railroad to, there were two competing
railroads that opened up and they were charging low fares because they were in a
price war with each other. So lots of people said let’s
go look at Los Angeles. It’s beautiful out there, you know? Nice homes, and but
then there was a bubble and prices went up and the newspaper, the Los Angeles Times was
saying, people are crazy here, It can’t be right. And, sure enough, they collapsed. And then, though, someone
on the LA Times wrote, never again will California (laughs). We Californians have learned our lesson. (audience laughing) And they were right. It wasn’t for generations, but
eventually it happened again. So I find it hard to, the next bubble? I’m more focused on the existing. If the question is, will
the stock market continue to go up like it is and set a new record like we saw in 2000? I mean, in terms of increase. I don’t know. I do questionnaire surveys of people and try to psych the market out, but I find it always
a little difficult to. It’s cultural change that’s hard to, we seem to forget about
asset bubbles for a long. So I mentioned the Los Angeles bubble. You don’t find anything in
California like that for, until the ’70s, 1970s. We kind of went 90 years without
a big bubble in California. And now, we’re back and thinking about it. So, I’m sorry, I’m not really
answering your question. – [Audience Member] I
figured I’d give it a shot. (audience laughing) – Hello, is it on? Yeah, OK.
– Yeah. – I’m Ian MacInnis, a faculty
member in Information Studies, and you pointed out that
the current boom is, might be related to fears
of increasing inequality due to technological advance. And some economists argue
that technological advance will never result in a decline of the overall demand for labor. There will always be replacement new jobs,
– Right. – regardless of the level of automation. Do you agree with this, or do you think technological advance
is different this time? – Well, first of all, that was
never a theoretical result. Economists expressed that idea, but he economic theory doesn’t say that technological change is guaranteed to create good jobs for everybody. That’s more or less an
observation about the past. It has been that way, that you might have
gotten much more alarmed than was warranted in the past when these things happened. So I tend to think of
it as, labor is a fact. There’s different kinds of labor. There’s skilled and unskilled labor. Well, back in 1948, an MIT math professor, Norbert Wiener, who was a
pioneer in computer science, wrote a book called Cybernetics and that’s a book about computers. He was trying to name it
cybernetics, back then. And, at the end of the
book, he had a thought, a rumination about what, he didn’t call them computers yet, but I’ll call them computers. He said something like this, I’m worried about computer revolution because they replace the human mind. And what are we but
information processing? And I’m quoting him loosely because I don’t have it in front of me. He said, I don’t know
what I worry about more, the atom bomb or the computer. And this was right after
Hiroshima and Nagasaki. So the atom bomb causes
tremendous destruction, but so does the computer. He said what, he,
quoting Wiener back then, “What what is someone of
ordinary talents to do “when machines can dig better “or they can drive better?” Then, so now, there’s an old myth that PhD students in some
fields that are not in demand end up driving taxis, so right (laughs), but we may be approaching a
driverless car equilibrium (audience laughing) where we don’t even need them there. So this isn’t my, oh, you
know, many people say that. It’s not a particularly
original idea with me. In fact, I’m not claiming any originality. I’m saying everyone, lots of people out there are fearing this because when they do it individually, they’re trying to think,
what am I going to be doing? And you find that things that you learned that you thought you were, you learn a foreign language, right, and you’re very proud of it. And then you go to the country and you see people have
their little phones out and they’re carrying on a conversation. I had a, when I was in Beijing recently, my guide somehow got lost and I had to get, to give another talk, so they gave me a Chinese girl who didn’t speak English hardly at all. We did just fine. She had her little computer and she was on her little
handheld and she was writing and then she showed me in English and we had a nice conversation. And so–
(audience laughing) And that’s now. What is it going to like in 30 years? And I think people are
right to be worried. And the thing is, what do you do? I have students asking me,
what should I major in? What major is safest? And I can’t even answer that. What is safe anymore? So that’s why I think it’s plausible that those of you who are parents, and, by the way, another thing
that’s happening right now is people are really
education-oriented, right? This is the time when everyone
wants to get into college and they want to get into a good college and they’ll pay huge tuition to go to it. The parents are upset about this, now. This is another sign of our time, but I think it’s driven
by a similar anxiety, that you just don’t know. What am I preparing myself for? And you sort of want to get
some mentors who will tell you, but unfortunately, we can’t tell you. However, we’re mentors. – Thank you, Professor Shiller. My name is Brian. I’m a journalism and finance major here. You said that a lot of
people are saving more, that they’re not spending,
which has created a paradox of high prices and a weak economy. – [Bob] They’re trying to save more, but they may not.
– Try, trying to save more. In lieu of the Federal
Reserve’s comments yesterday that seems to show that
they have no interest in raising interest rates,
at least until June, what should the monetary
policy be in the coming months or in the coming year to
try and handle that paradox? – Well, I think, yeah, now
this is not an exact science and I’m not the world’s expert. We have the world’s expert
right here, (laughs) not me. Maybe I should defer questions to you. Do you want to answer that? – [Paul] Only for six days. (audience laughing) – OK, (laughs) so anyway, I think that we have to thank our central banks around the world, that’s my opinion, for having done some aggressive measures
with existing tools. They had an authority to do certain things and they used what they
had an authority to do and prevented what might
have been another depression. Now, we’re coming out of that and I find these discussions in
newspapers like hairsplitting. So Janet Yellen dropped
the reference to patience in the last FOMC statement. Should she have done that? Boy, that’s a subtly, right? Now, it may be that she’s really good at just making decisions
like that; I’m not. It’s a matter of judging what effects that a thing will have on psychology now. But, generally, I think
it, if I were in the Fed, I might have, hopefully,
done something similar to what Bernanke did. It’s the tools we have that
help to alleviate a crisis. – Hi, Professor Shiller. Actually, we have a, quite a
bit of social media questions coming at you today, virtually. One of them is can you explain your view on contingent capital
as a form of regulation? – Wow.
– And then– – [Bob] These are, this
is a technical question. (audience laughing) – And then, after that, could you also, do you think that the linear
model can explain the world? (audience laughing) So if you could, if you could– – Oh, OK, let me start with it. That was my PhD dissertation,
those linear models. – [Teal] If you could mull
on those two questions, that would be great, thank you. – Yeah, so linear models,
they have their use. I, this wasn’t what I
expected to talk about today. (audience laughing)
but I think think of them as part of the theoretical infrastructure that I used in my own past. But let me talk about contingent capital which is something that’s been
a, doesn’t say what it is. In the financial crisis, companies were running out of money, especially financial companies and they were going bankrupt, right? So the government regulators, when they see a company
running out of money, running down its capital,
their first thought is, let’s order them to raise more capital. But you can’t really do that in a crisis because then, nobody
wants to invest in them in the middle of a crisis. They can’t do it, and so it doesn’t work. So the idea is let’s have a
plan in advance of a crisis that provides more money
for a firm to survive on if there ever is a crisis. This is the contingent capital idea. So the idea is that
companies would be encouraged to issue convertible
bonds that are converted from debt in the equity
if there’s a crisis. And I was working with a group
call the Squam Lake Group that was producing proposals
and we had a proposal that the US government should
encourage convertible bonds that are automatically
converted into equity if the monetary authority asserts that a financial crisis is imminent. And that was one idea. I think it’s an interesting
idea, we proposed it, but the simpler idea is just to raise the capital requirements which is what our
regulators have emphasized. Anat Admati, she is a
professor at Stanford with Martin Hellwig have a book called The Banker’s New Clothes which I recommend which talks about this and they think we don’t
need contingent capital. Let’s just raise capital
requirements on banks so that they’ll have more
money in the next crisis. – So this question is basically purely a business point of view. Intel brought the technology for the computers and laptops and PC. That kind of technology
for the wood market, wooden-based housing, if coming up, and that research is always
going on at SUNY-ESF. I am also a part of
that, one of the research in processing the fiber of the hardwood. – [Bob] A fiber of hardwood? – Yes, a fiber of, hardwood
has a wonderful fiber. It’s hollow like hair. You can manipulate the fiber of the wood and that fiber of the wood and the wooden components
of the commercial buildings may be 10th floor or 15th
floor of a high-rises building made out of wood that
can remain sustainable even in adverse weather
conditions like a storm. – Yeah.
– And we see lots of storm, Katrina, Sandy, and earthquake
in California and so on. Even commercial building
will remain sustainable because of technology. And it will definitely survive, the housing in a building as well as safety of the people inside. If that kind of a technology is adapted, whether the housing market and the consumer behavior particularly, will it affect the economy? Particularly, it will save so much housing and the cost of repairing
housing in a storm zone and earthquake zone, how
it will affect the economy – Right.
– and the consumer? Thank you.
– OK. Well, this is beyond my particular, this is engineering expertise, but I have to say that it
sounds like other innovations that were developed over, in construction, over the last century. And the general effect
is to lower house prices. So let me talk about other
innovations that came in. If you go back to 1890, at
the beginning of my series, how were houses built? Well, you brought in workers, usually men, and they had these hand saws
and they had these drills that they did by hand. Not much was made pre-fab. Them they invented electric saws and then they invented electric drills and there was a whole stage of electric. The first electric drills had a big motor and they had to be plugged in and you had to bring
everything over to it. Then Black & Decker had
the idea of a pistol drill. You know, it’s like a gun. You point it and you make
a hole and it’s hand-held. And then, they invented
better lithium-ion batteries, and now you don’t have
to plug it in anymore. So all of these inventions
brought costs down. It’s a reason to think
home prices are going down, and you’ve just given me another reason to think that they’re going down. All right, but that’s offset by, there are some increasing scarcity of land and labor costs have gone up,
at least over the century, so they’re offsetting, leaving home prices just kind of in the middle, going nowhere. – [Audience Member] Professor
Shiller, thank you for coming. I noticed that in many of your slides when you were comparing countries,
you didn’t include China. – [Bob] I did not include China. – [Audience Member] And I was wondering if, perhaps, you could give
some insight as to why. And, kind of comparing,
if countries like China, there is a much higher savings rate, how does that affect kind
of some of the patterns that you were pointing out earlier? – Well, what to say about China. That’s a big, a big question. China is an ancient civilization that has been repeatedly knocked back by invasions and dynasty,
corrupt dynasties. They had a particularly bad
dynasty under Chairman Mao, as I interpret it, and
it left them way behind. Now, they’re better, much better, and they’re coming back
to their former greatness. What can I say? They’ve had very speculative markets. Housing market has been very speculative. They’ve built, made a lot of mistakes. They’ve built whole cities
that are largely vacant. Their stock market goes through
big swings, up and down. But they’re still a market. I don’t know, I have high hopes for China. I’ve invested. They, by the way, had a very low CAPE, a very low price-earnings rate. I don’t have a CAPE for them. And I was, just six months ago, I was saying China looks great. But, by the way, they’ve lost
that because they’ve gone up. The Chinese stock markets
have gone up a lot. And, but it’s very volatile. I think that China would
be a good investment as part of your portfolio, OK. (audience laughing) – [Staff] Right here. – [Audience Member]
Professor Shiller, first off, I would like to say that I took your economics
course through Open Yale – Oh.
– and I really enjoyed it. – Oh, yeah, by the way,
anyone wants to know, I have a whole mooc on Coursera, now. You can all take my course for free. (audience laughing) And apparently, you did it on the older Open Yale format? – Yeah.
– Yeah. – My question is, as we start
to see robo-advisors come out like the one that Charles
Schwab just released, do you think markets will start to become more rational as we have robots – Oh, automatic advisors?
– making decisions, yeah. – Yeah, I haven’t looked
at Charles Schwab, but it goes back to the, there, what was the name of the one
that William Sharpe created? William Sharpe was the founder of the Capital Asset Pricing Model theory, and he said we need to democratize advice. He put out, created a
website, what was it called? I guess it, does anyone know? It’s still out there. And now, there are more of them. So what they’ll do is, they’ll do a quantitative analysis for you and recommend diversification. So Charles Schwab, I was
just reading about it in the newspapers, offers one. So this, again, makes me worry about jobs as financial advisor (laughs) if it’s being replaced by a computer. And it might do a great job. I can imagine that it does. It’s automated and probably asks you to list all of or your assets
and what your occupation is. And it has some estimates
of the risks that you face and will recommend, probably, it’s probably a pretty good thing. But I’m, let me get back
to, my central question is, will you have a job as a financial advisor if you take a licensing
program in that today? And I think you still will because people still like
to talk to real people. And, you know, it’s Ray
Kurzweil, he has a book called, oh, what’s it called? The Singularity? Ray Kurzweil is a
futurist who writes books about the distant, oh, it’s called The Age of
Spiritual Machines that he wrote. He came out with this like 10 years ago. He says, today, when you
talk to your computer, you don’t for a moment imagine
that it’s like a human being, that it’s feeling anything. But he said, before long, they’ll get so good at talking
to you like a human being that most people will just
forget that it’s not human. And they’ll say, well how do I know? Some people will say, how do you know it doesn’t
have human feelings? It’s been so nice to me
and so loving (laughs). And so, some people will
start deluding themselves into thinking that, so that’s, but that may be far off. And I think still think that
it’s probably a good idea to pursue a career as a financial advisor, a real human financial advisor. – So I think it’s appropriate
that the last question come from the web, Teal? – You give me hard questions from the web. – Ask, for us, an easy
one for a quick answer. – Well, this one is from Leroy Jenkins. Yeah, so, Mr. Shiller, would
higher taxes on the wealthy and a universal basic income work well to address inequality? – OK, not–
– I feel like that’s a long-winded question.
– Right, right. I have to define, what is basic income? That comes from, I think,
I trace that back to a book written in the early
1960s by Robert Theobald called Free Men and Free Markets. And he said, it was a best-seller then, he said, look, the government
should just provide a basic income for
everybody, enough to live on. He said, why does everyone
have to have a job? Now, this sounds a little, I don’t know if I can present it, but, basically, he said,
(audience laughing) they think it’s a good thing
that some guy goes in every day and sits at an assembly line
banging out, doing something, when a machine could perfectly well do it. Well, we’re coming to an age where machines could perfectly well do it, so what to we want for people? He said, we want for
people to try to figure out how I can be useful. Let’s not have them in jobs
that are not really needed. It’s just make-work. So he said, the way to do that is to give a basic income to everybody, no questions asked, no welfare. You just get it free from the government. And he said, we’ll be a better world. People will be good parents. There’ll be more stay-at-home mothers. There’ll be grandparents. People will retire early and
they’ll do wonderful things for their family and their friends. That’s Theobald. It’s led to a movement,
in Europe, particularly. There’s something called the
Basic Income European Network. You get on their website;
they want to do that. But, by the way, they’re
totally unsuccessful. No European country will do it. Remember, a basic income is an income that you get automatically and you can just say, I’m a loafer. I’m just going to enjoy good music and I can barely afford it, but I’m just going to
sit and listen to music for the rest of my life. And that’s, Theobald would say, that’s great, if that’s
what you want to do. I don’t think that it can sell. And some of these extreme, I have, I’ve written about measures
to deal, and so has Len, and we’ve been working together on it. There are more subtle
ideas than the basic income that we can come up with. But I think we should be
worrying about income inequality, the let’s not forget that
people earned their income and we can’t be to aggressive in dealing. We have to have some kind of happy medium with these difficult issues
of income inequality. – I think we’ve established that Bob Shiller can answer
questions on any subject. (audience laughing) There will be a reception after this, 220 Eggers, the Strasser Commons. You’re all welcome to join us. And please join me in
thanking Bob Shiller. (audience applauding)
– Thank you.


  1. Can I get some clarification, There are times I hear Bob Shiller criticize the fed and others he praises them.  Is he saying what Ben Bernanke did was right?  Printing all that money to "save the economy" or is he just saying that if he were in that position he would do the same.  I have not read any of his books yet but cannot figure out if he is for Keynesian Econ or on the side of true free market Capitalism.  He is often vague..

  2. Delighted to hear two presentations on behavioral economics in 2015, from both Cornell University and now Yale to Syracuse University from the very well known Paul Volcker. It follows the concept of serendipity which was introduced to "combat" linear thinking in planning and development sectors which resulted in many facility-based approaches to quality of life in the community. Luckily, Paul Volcker follows the real estate and HUD (Housing and Urban Development) thinking to examine world home prices, and relationship stock markets, bonds and gold in investments and long term planning horizons. Congratulations on his Nobel Laureate prize win in 2013! Julie Ann Racino about.me/julieannracino

  3. Support Basic income Support for All!! Debate the Concept of "Laziness" with Nobel Laureate Bob Shiller the Next Time He Lectures! The Other Side of Poverty and "Debt Jails" Makes Laziiness Seem Like a Joyful Issue! Thanks for the inquiry in March 2015.

  4. i was searching for a study of how capitalist economies fueled by speculation create unsustainable systems that inflict tremendous damage on both their human participants and their natural environments, but this was close. yawn

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