Shiller says bond market not a bubble

Robert Shiller currently serves as the Arthur M. Okun Professor of Economics at Yale University. In his book, “Irrational Exuberance,” published at the height of the dot-com boom in 2000, he predicted the eventual dot-com crash in 2000. He co-created the Case-Shiller Index with Karl Case, which measures housing market trends and, in the second edition of “Irrational Exuberance” published in 2005, used his research to warn about a possible meltdown in the real estate market. Now, Shiller is about to publish his 10th book, about the role of Wall Street in our society after the 2008 financial crisis.

Yale University

Q. Let’s start with your upcoming book. Could you tell us a little bit more about it?

A. It’s an introduction to finance, its morality and how it affects our society. We are basically discussing a culture where wealth is equated with intelligence. If a person is smart, he has to be rich. “Finance and the Good Society” is a commentary on just such a financial culture. Actually the idea stems from one of my classes at Yale, “Financial Markets.” For several years, I have been training future incumbents to take on Wall Street. A recent article in [the] New York Times claimed that [the] overwhelming majority of Ivy League graduates choose finance as a profession. I basically wanted to account for our attitude towards finance and its changing dimension in the wake of Occupy Wall Street.

Q. In a recent article in Bloomberg, it was reported that U.S. bond market could be in a bubble where the bond prices are not reflecting the true value of these financial products? What is your take on that?

A. I actually don’t think I agree with that. In my book, “Animal Spirits,” I defined a bubble in detail. It is basically a rampant price increase because investors are investing in a product in hopes of a rise in prices. One can define it as a psychological contagion. In that context, our bond prices should drop because of the recent decline in the investment ratings by [Standard & Poor] but they have remained high which shows that the U.S. is a strong investment.

I think European debt crises may have led to an increase in the prices because [the] U.S. government is looking very strong relative to others. [The] U.S. remains a solid bet compared to other countries at the moment and it has come to play in the favor of bond market. Unlike Europe, it has never defaulted on its debt, which is actually a source of great American pride.

Q. In your conversations with the media, you have been in the favor of more borrowing by the government. How do you justify the idea of a U.S. government deeper in debt than ever?

A. It is indeed a difficult situation. There is Europe which could go into a double-dip recession, and the U.S. is also going through an economic slump. At a time like this, we really have to focus on creating jobs which could increase our consumption, and there are ample opportunities for government to do that. We have an aging infrastructure which could use some improvement. Look at I-95 and its traffic jams. Expanding that would sure create jobs!

Q. Recently Goldman Sachs’ fourth-quarter revenue has plunged 58 percent because of a plunge in trading revenues. Do you see a similar trend in the near future where there’s a long hiatus on stock market investment?

A. It’s a tough question, explaining these trends. The 1920s and ’90s were the most enthusiastic market times. But there was a boom in the market from 1932 to 1937 at the peak of Great Depression. I think Americans in general are entrepreneurial by nature. Our spending and investment ideologies are unique which can be hard to predict.

Q. What do you mean by “unique investment ideologies”? Is there a unique microeconomic phenomenon that has a macroeconomic effect on the economy?

A. In our society consumption is encouraged sort of as patriotism. Even in times of war when there’s reasonable incentive to save, U.S. consumption has shown dramatic increase. Governments all over the world encourage their consumers to save, which is not the case with American government. We have even been more forgiving of bankruptcy which carries a more severe stigma elsewhere.

I think it may have something to do with our past history because the United States is populated with people seeking adventures. It is touted as a society where you can achieve anything given you have the drive. With this collective risk-seeking behavior, it seems natural to be spending money because in the long run, the demand will provide us with the means to produce more. Historian Sheldon Garon actually wrote a really interesting book [“Beyond Our Means: Why America Spends While the World Saves”] about this phenomenon which could be worth exploring.

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