L.G.: That's the good side of it. What's the downside?
R.S.: The downside is that homeownership is not for everyone. It involves responsibilities, and it's possible to get in over one's head. So I think the rental market makes a lot of sense for people if they have more flexibility and they have less responsibilities. Often, managing a house is something that could be better left to professionals, rather than all of us individually. "My gutters need cleaning"—it's very inefficient. It could be mass production. We have an apartment building, and so somebody does it for the whole building.
L.G.: And it's possible that the smartest and more prudent thing to do, if you had a pile of money, rather than buy a house with it and put a down payment on a house, is to rent—and rents seem to be lower right now—and to take the money and put it in some mutual funds.
R.S.: Right, diversify. That does sound like the logical thing. Why should your investment portfolio match your consumption of housing services? When you rent, you're much more flexible. You can move out quickly without incurring transactions costs, and everything is professionalized, all the management. So the only problem that people don't like about renting is that it's a little bit too standardized, and they want to have their own home. They put up their own swing set in the backyard for the kids, and they decorate it to their own taste. That matters a lot to people.
L.G.: Because most people think of their house not as an investment or a speculative kind of thing but as the roof over their head?
R.S.: As an expression of themselves. Maybe there's an instinct, a homing instinct. One of the things that people derive the most pleasure from is working on their house. It's part of our basic instincts, I'm imagining—I'm just talking off-the-cuff here. To some extent, you're allowed to do that with a rental. You can decorate it as you like, but you have more limits.
L.G.: But if human beings operated purely on a rational basis and coolly analyzed the economic consequences of their actions, then it would make more sense to rent? Put your money elsewhere? Compare the growth of capital in the housing market to the other markets in which people put their money-what would be the answer?
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R.S.: If you want to invest in real estate businesses, that is a sector of the economy that should be part of a diversified portfolio, but in proportion. If you invest in single homes by yourself, then you're buying something that you need to know more about.
L.G.: Right, but can you compare the performance of somebody putting money into some mutual funds that are well managed?
R.S.: Yeah, the thing is, from 1890 to 1990, there was no real appreciation in housing values. So that means if you picked a random house, you would've made a profit only on the rent, if you bought a house as an investment and rented it out. And so then you'd have to be judging that cash flow. And if you picked something that rented at a high enough rate, you'd make money. But the capital gains part of it would've been—for the average house—nothing, in real terms.
L.G.: I see. You're talking to someone who is in a co-op, a small one-bedroom on the Upper West Side. Manhattan is a different sort of housing market than Indianapolis, obviously—I'm just asking as a point of personal privilege, I guess.
R.S.: How is Manhattan doing? Maybe I shouldn't even comment on that.
L.G.: Oh, Bob.
R.S.: I don't know. I'm getting in trouble.
L.G.: I'm not talking prospectively. We're not predicting.
R.S.: In the recent past, the co-ops and condos in Manhattan have done better than in the broader market. I'm basing that on information from Miller Samuels, which produces condo-price data, and the interpretation tends to be that Manhattan is a separate market. It's the financial center of the U.S.—or the world—and it's behaving similarly to how the City of London behaved until very recently. Last time I heard, they were both strong, and I think it reflects the strength of the financial sector, which is their prime industry.
L.G.: So Manhattan has been somewhat insulated or totally insulated from the housing price slump?
R.S.: It has been. Yeah.
L.G.: Tell me what your life is like now. You're a superstar.
R.S.: I don't know about that. The Case-Shiller index has been getting a lot of coverage. It's kind of nice because we've been producing the index for 20 years now, and for 18 of those 20, they got very little attention. I think it's because of the futures market—even though the futures market isn't very active—it's getting a lot of publicity. And it's also Standard & Poor's, which has a very good reputation. When we brought out the possibility of creating a futures market, that heightened attention to the quality of the index.
L.G.: But you're constantly on the road. You're traveling around the globe. How many miles do you log?
R.S.: I never totaled it up, but this week was crazy. I just know that I'm exhausted. Yale is taping my courses. They have this thing called Open Yale, and so they do this for maybe five or 10 professors a semester. It's a new thing, so I'm going to be online now for the whole world to see. So I feel like I'm on camera, in my lectures. So I did that two times this week.
L.G.: This is your class, Financial Markets?
R.S.: Yeah, and then I was talking to the [New Haven] Lawn Club. Then I gave another talk—sort of associated—about another person's book. But I gave a comment on it, also in New Haven. And then I gave a presentation at a departmental meeting. Then I'm here, and then I'm going to the Chicago [Mercantile] Exchange tomorrow. And then Friday I'm going to my publisher. These are all the talks. Recently, I spent a week at the New Economic School in Moscow, and that was very interesting.
R.S.: Well, futures markets are open to the general public. However, most of the general public don't trade in them. They're considered sophisticated instruments that usually are left to professionals. But there are some individuals who do it. So I suppose I should say what I think professionals would do with them mostly. And that is, they would then want to use them to help them create retail products that would help individuals. I call them continuous workout mortgages. So you can develop a mortgage whose balance reflects the change in price of your house, so that you can't get your home equity wiped out, and you can't end up underwater, as has happened to so many people now. If mortgage lenders had a futures market that was deeper than the one we had, that was more liquid, then they could write such mortgage policies and then hedge themselves from any implied risk. So we thought of them as an infrastructure for developing better financial instruments.
L.G.: That would theoretically reduce foreclosures to a lower level. Theoretically, it would be zero.
R.S.: Well, there would still be some, but for other reasons.
L.G.: People who were just incorrigible, stopped paying entirely-but people of good faith and good heart who are actually trying to pay their mortgages would benefit?
R.S.: Right. That's why I'm writing another book now. This is a time when I've been having trouble getting people to appreciate the advantages of these kinds of things. But now, this is a time when they might suddenly see it. So I wrote a New York Times column some months ago pointing out that the '30s was a time of great innovation, and it was because people saw the crisis. What people saw in the '30s was a deterioration of faith in our government and institutions, because people saw that the Depression was happening and nothing was being done about it. And so, this gave—actually, the Hoover administration as well, but mainly the Roosevelt administration—the heart to make big changes.
L.G.: Have you managed to persuade anybody in a position of power—a legislator or the Treasury Department—that this idea you have of continuous workout mortgages is something that should be enacted?
R.S.: This is new. This is going into my book. Although in 2003, I had a different name for it. I called it income-linked mortgages, and I had home-equity insurance attached to mortgages. So I have a new name for it. But it's the same concept.
L.G.: The mortgages can be renegotiated according to what the market is doing, and it's done on a continual basis, not an emergency basis. And then the financial institutions are hedging their risk with these instruments?
R.S.: Right.
L.G.: You know Chris Dodd [the Democratic senator from Connecticut who is chairman of the Senate Banking Committee]. I'm assuming he's a friend of yours. He's your senator.
R.S.: I have never met him. I have to call him up and try to meet him.
L.G.: You really are an academic!
R.S.: Yeah, I know. I've talked to his staffers. I've talked to Barney Frank [the Democratic representative from Massachusetts who is chairman of the House Financial Services Committee] about this.
L.G.: What is Barney's reaction?
R.S.: He has his own plan. But, you know, I should contact him again, now that you mention that, because I want mine attached to his plan. And whether that's a possibility, I don't know. It's a shame that our presidential election campaign has Barack Obama and Hillary Clinton trading insults instead of talking about these issues.
L.G.: And John McCain has sort of talked a bit about it. All of them have put forward some kind of proposal.
R.S.: There's some idea that there should be a bailout, which I agree with. I think it's obvious that something has to be done about people who otherwise are going to be thrown out of their houses. This has been obvious to lawmakers. Every time there's a financial crisis, going back to the early 19th century, they realize that you don't just let millions of people get thrown out of their houses, thrown into debtors' prison. We're not going to let that happen.
L.G.: Have you heard anything you like so far about any of these three? McCain? Obama? Clinton?
R.S.: Um, I'm not involved with politics at the moment. Whichever one wins the election, I'll work with.
L.G.: Sounds like you are involved with politics!
R.S.: I'm not mentioning any of them in my book.
L.G.: Well, good. Then we can talk about them without fear of scooping your book.
R.S.: But I didn't want to mention them because I think when the book comes out, that'll be almost over.
L.G.: Well, it may not be over. But do you get politically involved? Do you give money to candidates?
R.S.: Generally, I'm not that involved.
L.G.: Have you contributed to anybody's campaign?
R.S.: A little bit—basically not. I don't want to get into that. Let's say I haven't, basically not. It would've been trivial. [Federal Election Commission records show that Shiller gave $300 to the Democratic Congressional Campaign Committee in November 2006 and $500 to Connecticut senator Joe Lieberman's presidential campaign in January 2003.]
L.G.: This idea of "the ownership society" which George W. Bush has touted—you treated with skepticism. Why?
R.S.: I think it has some merit. In fact, the promotion of homeownership is a very important, stabilizing force. The Federal Housing Administration and the Veterans [Benefits] Administration have helped people of low income and also people particularly of minority status become homeowners. If we had a nation where low-income and minority people were all renters, I think it would have a different psychology. They feel more like part of this nation when they own a home. It is a good thing.
L.G.: That's the good side of it. What's the downside?
R.S.: The downside is that homeownership is not for everyone. It involves responsibilities, and it's possible to get in over one's head. So I think the rental market makes a lot of sense for people if they have more flexibility and they have less responsibilities. Often, managing a house is something that could be better left to professionals, rather than all of us individually. "My gutters need cleaning"—it's very inefficient. It could be mass production. We have an apartment building, and so somebody does it for the whole building.
L.G.: And it's possible that the smartest and more prudent thing to do, if you had a pile of money, rather than buy a house with it and put a down payment on a house, is to rent—and rents seem to be lower right now—and to take the money and put it in some mutual funds.
R.S.: Right, diversify. That does sound like the logical thing. Why should your investment portfolio match your consumption of housing services? When you rent, you're much more flexible. You can move out quickly without incurring transactions costs, and everything is professionalized, all the management. So the only problem that people don't like about renting is that it's a little bit too standardized, and they want to have their own home. They put up their own swing set in the backyard for the kids, and they decorate it to their own taste. That matters a lot to people.
L.G.: Because most people think of their house not as an investment or a speculative kind of thing but as the roof over their head?
R.S.: As an expression of themselves. Maybe there's an instinct, a homing instinct. One of the things that people derive the most pleasure from is working on their house. It's part of our basic instincts, I'm imagining—I'm just talking off-the-cuff here. To some extent, you're allowed to do that with a rental. You can decorate it as you like, but you have more limits.
L.G.: But if human beings operated purely on a rational basis and coolly analyzed the economic consequences of their actions, then it would make more sense to rent? Put your money elsewhere? Compare the growth of capital in the housing market to the other markets in which people put their money-what would be the answer?
R.S.: If you want to invest in real estate businesses, that is a sector of the economy that should be part of a diversified portfolio, but in proportion. If you invest in single homes by yourself, then you're buying something that you need to know more about.
L.G.: Right, but can you compare the performance of somebody putting money into some mutual funds that are well managed?
R.S.: Yeah, the thing is, from 1890 to 1990, there was no real appreciation in housing values. So that means if you picked a random house, you would've made a profit only on the rent, if you bought a house as an investment and rented it out. And so then you'd have to be judging that cash flow. And if you picked something that rented at a high enough rate, you'd make money. But the capital gains part of it would've been—for the average house—nothing, in real terms.
L.G.: I see. You're talking to someone who is in a co-op, a small one-bedroom on the Upper West Side. Manhattan is a different sort of housing market than Indianapolis, obviously—I'm just asking as a point of personal privilege, I guess.
R.S.: How is Manhattan doing? Maybe I shouldn't even comment on that.
L.G.: Oh, Bob.
R.S.: I don't know. I'm getting in trouble.
L.G.: I'm not talking prospectively. We're not predicting.
R.S.: In the recent past, the co-ops and condos in Manhattan have done better than in the broader market. I'm basing that on information from Miller Samuels, which produces condo-price data, and the interpretation tends to be that Manhattan is a separate market. It's the financial center of the U.S.—or the world—and it's behaving similarly to how the City of London behaved until very recently. Last time I heard, they were both strong, and I think it reflects the strength of the financial sector, which is their prime industry.
L.G.: So Manhattan has been somewhat insulated or totally insulated from the housing price slump?
R.S.: It has been. Yeah.
L.G.: Tell me what your life is like now. You're a superstar.
R.S.: I don't know about that. The Case-Shiller index has been getting a lot of coverage. It's kind of nice because we've been producing the index for 20 years now, and for 18 of those 20, they got very little attention. I think it's because of the futures market—even though the futures market isn't very active—it's getting a lot of publicity. And it's also Standard & Poor's, which has a very good reputation. When we brought out the possibility of creating a futures market, that heightened attention to the quality of the index.
L.G.: But you're constantly on the road. You're traveling around the globe. How many miles do you log?
R.S.: I never totaled it up, but this week was crazy. I just know that I'm exhausted. Yale is taping my courses. They have this thing called Open Yale, and so they do this for maybe five or 10 professors a semester. It's a new thing, so I'm going to be online now for the whole world to see. So I feel like I'm on camera, in my lectures. So I did that two times this week.
L.G.: This is your class, Financial Markets?
R.S.: Yeah, and then I was talking to the [New Haven] Lawn Club. Then I gave another talk—sort of associated—about another person's book. But I gave a comment on it, also in New Haven. And then I gave a presentation at a departmental meeting. Then I'm here, and then I'm going to the Chicago [Mercantile] Exchange tomorrow. And then Friday I'm going to my publisher. These are all the talks. Recently, I spent a week at the New Economic School in Moscow, and that was very interesting.
L.G.: But you're sort of a celebrity academic at this point—you've had a bestselling book. How long has that been going on?
R.S.: Probably since 2000, when Irrational Exuberance came out.
L.G.: And I'm sure Princeton University Press expects a similar performance from your next book. That's a prediction. But you have a lecture agent, right? Alan Greenspan has, for instance, pocketed $250,000 for one night. Are you up to that level yet?
R.S.: I do have a speaker's bureau.
L.G.: You're now literally a brand name. How has that affected your life just as a person?
R.S.: Well, I had to get a full-time secretary at Yale to handle this, and there was some resistance from some people at Yale. I had to go all the way to the provost to get it, but now I do have a full-time secretary. So it's just not a normal level of business that I've had.
L.G.: And I'm sure all of your colleagues in the economics department are just delighted with all the positive attention you're getting—and the money you're making!
R.S.: [Laughs.] I don't know what you mean by that. I've had some animosity, yeah.
L.G.: What's the old saw about academic battles being so vicious because there's so little at stake?
R.S.: Oh yeah, I know the quote you're looking for, something like, "The viciousness of academic battles is exceeded only by their lack of consequence."
L.G.: And I'm not sure, but I would assume that you're being hit with the term popularizer. You're writing popular books. You're not doing "serious" work.
R.S.: There is some of that, although my books are university-press books, and they are not so obviously popularization. I'm presenting them as serious, so I'm not dismissed that way—not to my face anyway. But there is some sense that I'm not, among some people—what would be the word—central to the field. The way universities work is, the market is divided up into different fields. There's microeconomics, macroeconomics, labor economics, and so on, and often when we search for a new professor, we search by field. And this puts polymaths at a disadvantage. I remember Ben Mandelbrot, who used to be at Yale, and he would complain—he's the one that invented fractals, and he's one of the eminent mathematicians in the world—but he complained he couldn't even get a job in the university, because everyone said, "He's not my department." And he was doing work in physics and mathematics and meteorology. So I'm not quite as universal a man as he.
When you get to scholarly work, the most important thing is that you're original, and so you shouldn't feel confined. It seems to me that human knowledge is so complex that it doesn't fit neatly into fields. And you may discover that your background-what you learned at this point in your life-creates opportunities for research that nobody else is doing. So, for example, like my creating a home-price index back to 1890. It's kind of a strange thing that no one else had done it. Why is that? I don't know, but it may have something to do with the divisions. It's also a sense of what you would be rewarded for in your work. And academics want to be central to their field, and this is just data collection, and so, "What does that do for me?" If they just think, "Well, there's probably some government agency that's doing it. If not, they ought to be doing it-not me." It's too lowbrow. It's not that it's unscholarly, because it can be done in a careful way.
L.G: Certainly you were very particular about the data you used.
R.S.: Yeah, the other thing is, this may reflect that my father was a mechanical engineer, and he got patents in industrial ovens. He started his own company, which didn't succeed. But I think, years later, some of his values reassert themselves in my imagination. And so it made me a bit of an engineer, and that kind of mentality doesn't abound in economics departments.
L.G.: But back to the superstar thing. Now you're to the point where you have to be careful with things you say in public, because things that you say could move markets. What's that like?
R.S.: Um...that's an interesting thought. One time, I was on a TV show on business news, and before I went on, the host said, "You realize the market is falling right now? And we're going on the air." He didn't explain what that meant. But there was a suggestion that I could be a problem—my bearish sentiments.
L.G.: You've always been pretty much a bear?
R.S.: Not always. In 1982, I was a real bull. I had 100 percent of my money in the stock market.
L.G. Now you got it all out, but you still have Kmart?
R.S.: How'd you know I still have Kmart? Yes, my mother gave me Kmart, so I didn't want to sell it.
L.G.: But mostly you're in Treasury notes or something?
R.S.: Largely in that, and inflation index notes.
L.G.: You're a homeowner?
R.S.: Two houses. One in New Haven and one on an island in Long Island Sound. It's a summer home. My neighbors don't want the name of the island in the story. That's what my neighbors have said.
L.G.: Really? Do they think your groupies are going to swim over?
R.S.: I don't know what they think.
L.G.: Do you have groupies now?
R.S.: [Laughs] I wish I did.
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