World According To ... Robert Shiller

A rock star among economists, the Yale professor who called the dot-com-era bubble in stocks says that the housing slump could turn out worse than that of the Depression.
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Eight years ago, when he predicted a looming bust in the stock-market bubble in Irrational Exuberance, his bestselling book, Barron's magazine called Yale economist Robert Shiller "the new Dr. Doom." The nickname still applies as Shiller muses that the steep slide in housing prices-with the collateral damage on Wall Street-could end up exceeding that of the Great Depression.

Since blurting out his scary scenario last week at the New Haven Lawn Club-in a speech that prompted gloomy headlines around the country-the professor has been trying to sooth shattered nerves (including those of his business partners, who are trying to get the Securities and Exchange Commission to sign off on a new financial instrument to join Shiller's two-year-old housing futures on the Chicago Mercantile Exchange).

The 62-year-old Shiller has been an academic superstar for years, largely because of the Standard & Poor's/Case-Shiller home price indexes, which he developed with Wellesley College economist Karl Case as the nation's most authoritative source on housing price trends. But when Portfolio.com caught up with him in Manhattan for an exclusive interview last week, Shiller was chastened and cautious, noting that he better not make any more predictions during the S.E.C.'s required "quiet period" before the registration of the new instrument.

"I don't even really remember what I said exactly," he protested. "I always think the opposite of people around me," he added. "That's sort of an oppositional personality."

Lloyd Grove: How did you get into this line of work?

Robert Shiller: You mean property derivatives?

L.G: No, I mean how did you become interested in economics and being a market theorist?

R.S.: Well, I think I'm a polymath. I'm interested in everything. When I was a senior in college at the University of Michigan, I was dazzled by the choice set that we had. Young people, you can do whatever you want, and I was disappointed that I had to choose one, realistically. You like to be a renaissance man and do everything. I took long walks trying to decide whether I wanted to be a physicist or a medical doctor or a sociologist, whatever-a scientist, an astronomer.

L.G.: Did you grow up in Michigan?

R.S.: I grew up in Michigan. My father was an engineer in Detroit, and we moved to the suburbs, Southfield, when I was 13. Actually, I'm a product of the auto industry in the important sense that in 1914, Henry Ford-I don't know if you know this history-he announced that he was paying $5 a day for assembly-line workers, which was twice the going rate. This was a very bizarre thing for him to do, and it got a deluge of applicants. So one of my grandparents was living in Gardner, Massachusetts, working in a stove shop, and my other grandfather was a tailor, operating in Chicago. And they both responded and came to the same River Rouge plant, and both took the jobs. If they hadn't converged in Detroit, my parents never would have met, and I would not exist. So it turns out that Henry Ford-it was really kind of a dumb thing-is responsible for my being here. He was a little bit of a loose cannon, but he was saved by inflation. Because World War I came right after that, and he never had to cut back. Otherwise, he couldn't have afforded to pay those salaries, as my understanding of history goes.

L.G.: Right, and $5 a day-that's big money.

R.S.: It was twice what my grandfather was making in Gardner, selling stoves. So the auto industry has always been in our family, except my father worked for an industrial-oven company that sold ovens that did things like bake the paint enamel on the car body.

L.G.: Is there any hope for the American auto industry?

R.S.: Maybe in the long run, they will prevail. I know they're having hard times now. And they're a manufacturing industry, and they did have a labor-cost disadvantage as compared with other countries. That may not be insurmountable. But in the long run, in these other countries, I'm hopeful that their wage costs will go up too. So maybe American ingenuity will prevail in the end.

L.G.: You were among the first people who were warning about a crash in the housing market.

R.S.: Right. In 2003, I published a Brookings [Institution] paper with Case, which was titled with the question "Is There a Bubble in the Housing Market?" [in Brookings Papers on Economic Activity 2: 2003]. He's the same guy who worked with me on the Case-Shiller indexes. We had been doing a survey on home buyers, to try to assess their attitudes. In 2003, we noted in our paper that people had very high expectations for future home-price appreciation. We thought then that it might help explain the boom that was emerging. If people were having high expectations, then maybe they're willing to pay more for houses. But we didn't reach a conclusion-well, it was all carefully worded back then. We thought that there might be a bubble.

L.G.: Back in 1996, at a lunch meeting with Alan Greenspan, you warned about a stock-market bubble. And then a few days later, he used the words "irrational exuberance," which became the title of a book of yours. By 2005, you were already sounding the alarm about housing.

R.S.: Right. You can see that in the book Irrational Exuberance, in the second edition, in 2005, I raised the possibility of there being a major crisis.

L.G.: And that was ahead of a lot of people, obviously.

R.S.: It was.

L.G.: So then you had meetings with various quasi-government entities-Freddie Mac and Fannie Mae. What did you tell them?

R.S.: That they should be hedging their portfolio risks for the possibility of a decline in home prices. We just never really got their attention. We told them they had a portfolio that was heavily exposed to real estate risk and that it would be sensible for them to take hedging positions that would offset that risk, especially given their public G.S.E. [government-sponsored enterprise] status. The government officially disavows any guarantee to Fannie and Freddie. However, their debt tends to have a lower yield than other corporates. And people believe that they will be bailed out if there's ever a problem. So we were arguing that they have an obligation to the public to manage their risks.

L.G.: And their reaction was to listen politely?

R.S.: Yeah, that's what happens all the time. We'd talked to insurance companies 15 years earlier about home-equity insurance. And sometimes it's a little bit more than polite listening-they actually sounded enthusiastic at the meeting. So we told insurance companies, "You have homeowners' insurance, insurance against fire. So what if you expanded that to cover and insure against losses on the home? Wouldn't that expand your business a lot?" Actually what they typically said-I think it's mainly what Fannie and Freddie said-is, "Well, there isn't an established market for home-price risk. So we couldn't hedge the risk." And I suppose that's also what Fannie and Freddie thought, that they have a portfolio measured in billions, and we're just talking very hypothetically because we didn't have any market price, and we didn't have any obvious ability to make a risk-management contract of any size. So it came across to them as just a pipe dream. And I suppose that's just the general thing.

L.G.: Were you visiting them in your capacity as a company?

R.S.: Yes, our company, Case-Shiller Weiss, was publishing indexes, and we were advocating for risk management.

L.G.: And some of the people who met with you said that they've been doing their own due diligence. Tell me about that.

R.S.: I had a conference at Yale, and it was Frank Nothaft [the chief economist of Freddie Mac] who told about the risk management. And this is actually in my book that's coming out-I'm scooping my book here.

L.G.: Well, we'll flog your book and make sure people know it's coming out in two months.

R.S.: That would be good.

L.G.: Princeton University Press-what's the title of it?

R.S.: The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do About It.

L.G.: Consider it flogged.

R.S.: Flogged? What does that word mean?

L.G.: I guess flogged is what happens in Singapore if you spit on the sidewalk. So, okay, go ahead and scoop your book some more.

R.S.: I have a publicity manager, and he said I shouldn't talk too much about it.

L.G.: Okay, but why don't you tell me that story at least.

R.S.: Well, that story was that Frank Nothaft claimed that they had considered price declines as much as 13.5 percent. And I said, "What if it was worse than that?" And he said, "It's never been worse than that." And then he corrected himself. "Except for the Depression." I don't remember exactly what I said to that, but plausibly it was something like, "Well, that could happen again too." So again, I started to sound at that point too academic-something like this isn't real anymore.

L.G.: Why do you think people just have trouble listening to these things?

R.S.: Well, I can talk as a sociologist-which I'm not trained to do-but there's a social construction of reality that happens. This is a basic principle of sociology. We have a "collective consciousness," to quote sociologist Maurice Halbwachs. As far as I know, he coined the term. And the point is, we talk so much. The human species is incessantly talking, and this incessant talk reinforces certain memories and facts. And other facts are not reinforced because no one's talking about them. So they elude our consciousness, and then we can't remember them. We can't act on them anymore, and so a certain sort of reality-construct forms. It's also informed by some kind of intuitive thinking. In the case of real estate, people think that the growing population is inevitable, and that means home-price increases are inevitable. And these are not economists thinking clearly about what that means. An economist who thinks about that would say, "Yes, but that doesn't make them a good investment." If everything is priced at the present value of the cash flow with the same interest rate, then it doesn't matter whether the cash flow is growing or not, and then everything is equally good as an investment. That's not something that the general public understands.

L.G.: The people who were getting into subprime mortgage-backed securities presumably understood all this. They're very sophisticated people. So what was driving them?

R.S.: Some of them were very sophisticated people [laughs], and there was a failure to communicate and a failure to put all this information together and act on it in a systematic way. There's a famous book written by Irving Janis, who's a psychologist, about 30 years ago, called Groupthink. He's a social psychologist, and he points out how even expert groups can make very colossal errors. He did a number of case studies in the book, and what tends to happen-suppose you imagine yourself and a group of experts who seem to have converged on an enlightened opinion which has arguments to support it, and it has prominent influential people saying that. It can be difficult for someone to stand up in that room and air what seem to be half-baked or half-formed doubts about it. It can be kind of damaging to your reputation. And you imagine that they have a reason to dismiss these doubts. But you don't want to be responsible for bringing it up-especially when they're reaching a decision. Sometimes they're trying to make an important decision. And at that time, you would think that people who have doubts should stand up and thrust them to the fore. But, in fact, they often retreat at that point, because they may just have a sense that they're being annoying, that they will lose status in the group. If we're close to a decision on something, and I'd raise doubts, and they're going to go ahead anyway and do it, you might think that's good-because it could be a disaster, and they'll remember that you had doubts. But the likelihood is to focus on, instead, "Now I'm kind of the party pooper," you know. "When they're going to implement this plan, they're not going to turn to me because I was the guy who doubted." Things like that went through peoples' minds, and they don't air doubts. And when Janis interviewed people afterward and asked them their memories of the discussion, they would say things like, "I think we had a very open and fair discussion, and everyone raised their views." That was their memory of what happened, but they couldn't remember the other arguments. So it wasn't happening-there was somebody who was expressing doubts, but not effectively. And so I think that's the kind of thing that happens when there's just a general presumption which becomes repeated everywhere.

L.G.: And do you think that's the sort of dynamic that might've been operating, not only in quasi-government agencies like Fannie Mae and Freddie Mac, but also in the banks on Wall Street?

R.S.: Yeah, I mean, it became the idea that risk was just not there.

World According To ... Robert Shiller Part 2

L.G.: That's not been a problem of yours, because you're not part of that particular group.

R.S.: I'm an academic, and academics have a tradition of standing up more. Even so, this groupthink happens even in academia. But I think that's actually something about my personality. I always think the opposite of people around me. My wife complains about that. She said, "You always have to take the other side." And I said, "But on the other hand...." My wife's name is Virginia, but I call her Ginny. She's a psychologist.

L.G.: So you often take the opposite side of what she says.

R.S.: Right.

L.G.: Like that old Monty Python routine: "This isn't an argument. It's just a contradiction!"

R.S.: I imagine so, yeah. So what would that be? That's sort of an oppositional personality.

L.G.: But presumably you say these things because you have cause to believe them. You're not just being contrary. You actually did believe that there was going to be a bust and that there were too many subprime mortgages out there. But what's surprising to a layman like me, who knows nothing about this, was there were so few people who were willing to analyze that. And you were not only saying it-you were actually trying to get people to do something about it. And no one listened to you at the time.

R.S.: No, I think they started to listen. Everything happens with a lag through time. So for example, the O.C.C. [Office of the Comptroller of the Currency] did eventually issue guidance, but it took them a while.

L.G.: Now Alan Greenspan has been taking a lot of heat for his alleged role in all of this. And he recently tried to mount a sustained defense of himself. You probably saw that.

R.S.: I saw a Financial Times piece.

L.G.: Well, he's been doing it everywhere-I saw it in the Wall Street Journal. He's gone on a self-defense campaign.

R.S.: Yeah, that's probably a good thing for him to do because people thought he was a genius. He got out in 2006, which was almost exactly the peak. So he timed his departure right. But now he's out, and he didn't anticipate this. Even if you look at his autobiography, it's not there that he anticipated this crisis.

L.G.: So do you think he deserves some of the credit, or blame?

R.S.: Well, I actually think he's a very smart and well-meaning man, but I have differences of opinion and so I can't fault him for that. I don't think he was dishonest. I think he was calling it as he saw it. I guess as a Fed chairman, you do have a little bit of a bias toward optimism. Because if you say anything vaguely pessimistic, it gets you in trouble. In fact, the reason why the term irrational exuberance is famous-and people forget the reason for that-is because when he uttered the words, the stock market crashed almost immediately. He did this talk in the evening, and the U.S. markets were closed, but the Japanese markets were open-and they crashed immediately. So that was the news story at the time. He just utters the words irrational exuberance, and that just causes a cascade.

L.G.: Just two words in a very long speech.

R.S.: Yeah, I told you about my experience yesterday [April 22]-a few words in my speech at the New Haven Lawn Club somehow got amplified. [In a breakfast talk that made doom-and-gloom headlines nationwide, Shiller warned that the housing market slump could be worse than the 30-percent price drop of the Depression, requiring bailouts for millions of homeowners. "I think there is a scenario that they could be down substantially more" than the historic slump of the Depression, Shiller was quoted as saying.] They took from my speech that I was saying that the home-price declines could exceed those of the Depression. And that's it. That was the story. I don't even really remember what I said exactly, but it was a comparison I might've made in the course of making this presentation.

L.G.: It's known obviously that you have-coming up on two years-these housing futures. And you said when you started doing this that there'll be other instruments. So you're doing another one of those. We don't know what it is. You can't talk about it during a quiet period. But talk about what's already there. How's that doing?

R.S.: Well, we have a futures market. I have a chart of the open interest. It rose from nothing at the beginning to over a hundred million dollars, and we were very optimistic.

L.G.: How many trades did that represent?

R.S.: I don't have the numbers.

L.G: I saw something that initially it was like 2,000 some-odd trades.

R.S.: Well, each trade has a notional value of $60,000, and it seemed to me that generally the highest it got for a day was about 100 trades. So that would be $6 million-I'm not sure I remember that exactly right. So if you added up the total volume of trades, I thought it was something like $600 million.

L.G.: So the volume of the trades sort of slacked off a little bit?

R.S.: That's right. Because [the housing market] is in decline, yeah. I'm hopeful that it will come back.

L.G.: Right, but already you've bested the London FOX [the London International Financial Futures and Options Exchange, which offered property futures from May through October 1991.]

R.S.: That one ended totally in a few months [in a scandal involving the artificial manipulation of trades].

L.G.: Have you ever considered scandal futures?

R.S.: [Laughs] No.

L.G.: Tell me, what do you call your futures?

R.S.: The Chicago Mercantile Exchange Housing Futures and Options.

L.G.: Tell me what function they serve.

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.

World According To ... Robert Shiller Part 3

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.

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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