Immensely Credible Robert Shiller: "Depression Lurks Unless There’s More Stimulus

Discussion in 'Economics' started by ByLoSellHi, Apr 15, 2009.

  1. Wow.

    I happen to think Robert Shiller is one of the most credible and least sensationalistic economists anywhere.

    He nailed the housing crisis years before it hit.

    For him to make this statement, speaking of 'depression,' for the first time ever, is incredible.

    http://www.bloomberg.com/apps/news?pid=20601039&sid=abXAaO4xI704&refer=home

    Depression Lurks Unless There’s More Stimulus: Robert Shiller

    Commentary by Robert Shiller

    April 15 (Bloomberg) --
    In the Great Depression of the 1930s the U.S. government had a great deal of trouble maintaining its commitment to economic stimulus. “Pump- priming” was talked about and tried, but not consistently. The Depression could have been mostly prevented, but wasn’t. Ultimately, the reason for this policy failure was inadequate understanding of the relevant economic theory.

    In the face of a similar Depression-era psychology today, we are in need of massive pump-priming again. We appear to be in a much better situation due to the stronger efforts to date. Still, there is a danger that, because of a combination of faulty economic theory and inadequate appreciation of human psychology, as well as deep public anger, we will not continue with such stimulus on a high enough level.

    We desperately need to be persistent, keeping our government response adequate for the problem at hand on a sufficient scale and for sufficient time.

    George Akerlof and I lay out how economic theory needs to be changed in “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism” (2009). It shows that the most basic questions can only be answered if we take into account how psychology affects fundamentals such as our sense of fairness or corruption in our economic transactions, which helps determine how trusting or wary we are at any given time.

    Following John Maynard Keynes, we call such motivations animal spirits.

    Confidence is Key

    Our theory of animal spirits is centered on confidence, and the vicious downward cycle of loss of confidence leading to decline in economic activity and then to more loss of confidence. This cycle is fed by the proliferation of stories of failure that spread like a virus by word of mouth over months and years. Moreover, our theory emphasizes that the sense that our society is basically fair can become wounded, and if that happens will not heal for many years.

    In our analysis of the current economic crisis, we conclude that the government should have two targets. One would be a joint fiscal-monetary policy target. The same kind of expansionary policies embodied in the government expenditure stimulus and tax cuts that are already being tried have to be done on a big enough scale and for a long enough time in the future.

    Gauging Success

    Following this target, aggregate demand should be sufficiently high that firms producing good products at a price the public would want to pay will be able to sell them. And if this target is met, skilled labor willing to work at a wage that makes it profitable to sell such products will be able to get a job.

    The government should also have a credit target. Once again, we are calling for more of the same kinds of existing policies, but there should be an explicit measure of their success, and until that is reached, the scale and time frame of such policies need to be extended.

    The Federal Reserve has to be the lender of last resort and to provide credit in circumstances like we have today. Businesses and consumers, who in normal times would be good credit risks with legitimate needs, should find credit available at reasonable terms. Achieving this requires new approaches, like those announced by the Bernanke Fed and the Obama administration, but on a continuing and even larger scale.

    Outrage Creates Dangers

    But we have lived for years in a system that tolerated the high-flying inequalities of the current financial system to play itself out, without protest. Where was the outcry then? Why should it not be much more generally targeted? We had two large tax cuts at the federal level that gave highly disproportionate tax advantages to those at the very top. It even gave special provision for extremely low tax rates, much lower than you or I pay on our regular wage income, to managers of hedge funds.

    In this crisis, acceptance of these measures is being replaced with outrage. It is increasing the blood pressure of the public, and that can’t continue without damage to our system. Compensation practices in the U.S. need to be made fairer. Vast earnings shouldn’t go virtually untaxed, while the middle class is paying a sizable fraction of each extra dollar in taxes. Only then will the government have the mandate to restore our banking and securities institutions to their proper strong role in our economy.

    Shutting Hoovervilles

    It is now time to stimulate demand. It is also time to repair the credit system. Those are the two targets that must be hit to get us out of the current economic slump, and to restore confidence. It will be costly to meet both of these targets, and it will require new legislation to give enhanced regulatory powers to deal with a greatly changed financial system, now in a systemic slump.

    It is time to face up to what needs to be done. The sticker shock involved will be large, but the costs in terms of lost output of not meeting either the credit target or the aggregate demand target will be yet larger.

    It would be a shame if we are so overwhelmed by anger at the unfairness of it all that we do not take the positive measures needed to restore us to full employment. That would not just be unfair to the U.S. taxpayer. That would be unfair to those who are living in Hoovervilles in Sacramento and Fresno, California, and elsewhere; it would be unfair to those who are being evicted from their homes, and can’t find new ones because they can’t find jobs. That would be unfair to those who have to drop out of school because they, or their parents, can’t find jobs.

    It is now time to keep our eye on the ball and set clear targets to fix a system that broke when our animal spirits got out of bounds.

    (Robert Shiller is the Arthur M. Okun Professor of Economics and Professor of Finance at Yale University, and Chief Economist at MacroMarkets LLC. The opinions expressed are his own.)

    To contact the writer of this column: Robert.shiller@yale.edu
    Last Updated: April 15, 2009 00:01 EDT
     
  2. This is Robert Shiller, not some 'gold bug,' 'tin foil hat,' 'end of the world' kind of guy.

    He has immense credibility.

    Even in the depths of the market plunge in February, or back when the residential real estate market was breaking hard for the first time back in late 07 and early 08, I never heard him ever mutter the big 'D' word.

    I find it very disturbing that he is now publicly opining that we could very well face a depression without much larger government stimulus; a very politically unpopular notion at present.
     
  3. I guess he has some cred, but not once in his entire essay did he show that he understands the root of the problem - that the American citizen has too high of a debt level relative to assets. The solution would therefore be to offer nationwide debt relief or allow for a nationwide bankruptcy.

    The government can print away all it wants to or create jobs for folks to dig ditches and fill them back up. Until Americans have a positive net worth, little will be accomplished.
     
  4. The Gummint is trying to get the economy "back on track" without much more in the way of people, investors, companies "taking the hit"...

    Won't work. One way or another, all of this debt will be accounted for.... even if it means hyper print-money inflation and the destruction of the $USD... which will bankrupt nearly every US citizen.

    Personally, I think the least painful overall and for the most people would just be to "let the market be the market"... and sort things out "Capitalism style"..
     
  5. Shiller: Economy Could Still Blow Up

    Wednesday, April 15, 2009 11:10 AM

    By: Julie Crawshaw


    http://moneynews.newsmax.com/streettalk/shiller_economy_blow_up/2009/04/15/203244.html

    Both policymakers and the public need to be mindful that managing an economy is much harder than nearly anyone understands, says Yale professor and housing guru Robert Shiller says.

    "This is more of an experiment than people realize — an ongoing, evolving experiment that can blow up," Shiller told Miller-McCune magazine. "That's the problem."

    Shiller says the "incredible stability of the U.S. economy since World War II" caused economists and others to lose sight of this.

    "I think the government deserves credit for stepping in and moving fairly fast, in some cases, to deal with this ... but still we are in the downward spiral because it hasn't been aggressive enough, and now we are in a more difficult situation because our confidence has been damaged," Shiller says.

    The entire economic system needs a redesign in order to reduce the likelihood of the present economic crisis happening again, Shiller says — and that redesign will take a long time.

    "You have to remember that the reforms that were spurred by the Great Depression were not just in Roosevelt's first 100 days, it was a decade-long phenomenon," Shiller points out.

    "That's the way it goes. Ten years from now we will be seeing new legislation that will advance the economy."

    The economic stimulus bill recently passed by Congress was the largest such endeavor since FDR’s administration, others noted.

    “We have plenty of big, complicated pieces of legislation that come down the pike, but this bill is unprecedented,” political analyst Stuart Rothenburg told Bloomberg.
     
  6. [​IMG]

    Robert Shiller says we need more economic stimulus to avoid Depression

    http://www.bloggingstocks.com/2009/...we-need-more-economic-stimulus-to-avoid-depr/

    [​IMG]

    Posted Apr 15th 2009 2:20PM
    By Zac Bissonnette


    Everyone has an opinion about whether the economic stimulus package is too big or too small, but he's an opinion worth listening to: Robert Shiller.

    As one of the few people to publicly call the internet and real estate bubbles for what they were, he has more credibility than just about anyone. And he's saying the stimulus package is too small and we need more if we are to avert another depression.

    In an op-ed piece for Bloomberg, Shiller writes that "In the face of a similar Depression-era psychology today, we are in need of massive pump-priming again. We appear to be in a much better situation due to the stronger efforts to date. Still, there is a danger that, because of a combination of faulty economic theory and inadequate appreciation of human psychology, as well as deep public anger, we will not continue with such stimulus on a high enough level."

    What makes Shiller's column unique is that he advocates combining the stimulus package with efforts at making the economic system more fair. People are righteously indignant at seeing their money go into AIG's frontdoor and then out the backdoor in the pockets of the company's executives, but Shiller takes it a step further. He writes that "Compensation practices in the U.S. need to be made fairer. Vast earnings shouldn't go virtually untaxed, while the middle class is paying a sizable fraction of each extra dollar in taxes. Only then will the government have the mandate to restore our banking and securities institutions to their proper strong role in our economy."

    It's certainly a valid point. But here's the problem: It's extremely doubtful the government has the resources or the competence to manage the largest stimulus package in the history of the universe. Can we really count on Uncle Sam to improve equality along with dispending the government cheese?
     

  7. The MPC for the average american the past decade has been roughly 1.03. Go figure why we are in this mess. I don't think you can initiate nationwide debt relief or forgiveness programs without massive inflation and devaluation of the USD. I think some people inevitably will go under, and it is sad, but in a way a necessary societal evolution. Richard Dawkins is probably pissed because his nest egg is evaporating with the rest of us, but this is the perfect opportunity for young people who are liquid and not yet enveloped in IRAs or mutual funds to really get a head start.
     
  8. Exactly, and the government keeps sticking its nose in the situation, and instead of constructively letting the market clear these assets, it only delays the inevitable, which will ultimately make the situation far worse and more painful than it otherwise would be.
     
  9. Ghostdog

    Ghostdog

    There is a simple equation here. They can pump as much money as they want into this thing (because its the only option left) but if unemployment does not start to drop, I mean real unemployment, not the doctored numbers, its all over my friends.
     
  10. I always appreciate the fact that at least some people 'get it.'

    It's all about employment.

    People will shop til they drop and buy houses, cars and plasma screen tv's until their blue un the face, even if interest and mortgage rates are high, if they have good jobs and aren't fearful of being fired.

    Take their job or the feeling of job security away from them, however, and you can cut interest rates and mortgage rates to 0% and have 50% off sales in every store - they aren't buying.
     
    #10     Apr 16, 2009