A believer in bubbles, Robert J. Shiller knows that financial crises have a way of repeating, whether they relate to sales of tulips, stocks or real estate.

An economist and author, Shiller heard the warning whistle of this latest economic crisis roaring down the tracks before the housing and financial markets derailed in an extraordinary wreck.

Editor’s note: Robert J. Shiller, a Yale University economics professor and author of "Irrational Exuberance" and "The Subprime Solution," will discuss how to mend the housing market during a keynote address at the Inman News Real Estate Connect conference in New York City on Jan. 7. The conference runs from Jan. 7-9 and will also feature talks by Lawrence Yun, chief economist for the National Association of Realtors, Craigslist.org’s Craig Newmark, and Realogy Corp. CEO Alex Perriello, among other industry notables.

A believer in bubbles, Robert J. Shiller knows that financial crises have a history of repeating, whether they relate to sales of tulips, stocks or real estate.

An economist and author, Shiller heard the warning whistle of this latest economic crisis roaring down the tracks before the housing and financial markets derailed in an extraordinary wreck.

During a keynote address at "The Housing Bubble: Fact or Fiction?" — an Inman News conference held in January 2003 — Shiller commented that home-price increases occurring at the time couldn’t "go on forever" and compared the surge to the 1630s tulip mania in Holland — a flower sales frenzy that drove up the price of tulips and ultimately bankrupted some well-to-do families — and to the stock market bubbles of the 1920s and 1990s.

He defined a bubble as: "a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, bringing in a larger and larger class of investors who — despite doubts about fundamental value — are drawn to the investment partly through envy of others’ success and partly through a gambler’s excitement."

And "real-world bubbles are like Ponzi schemes even though they are not fraudulent," he stated.

Shiller, who also spoke at an Inman News conference in October 2006, will return to the stage at the Inman News Real Estate Connect conference in New York City in January for a keynote address, "Finding a Fix for the Housing Market."

Shiller’s well-known book, "Irrational Exuberance," first published in 2000, warned about a stock market bubble, and the book was revised in 2005 to discuss the unsustainable rise in housing prices. The book offers a discussion on how impractical thought and behavior can destabilize financial markets.

In a March 2, 2008, column for the New York Times, Shiller explained how people can be blinded to risk in the expectation of investment returns.

"The failure to recognize the housing bubble is the core reason for the collapsing house of cards we are seeing in financial markets in the Unites States around the world," he wrote — this piece was published several months before the incredible actions of the Federal Reserve, Congress and global governments and financial leaders to shore up the financial markets as the spiraling fallout of the subprime meltdown and credit crisis headed in the direction of panic.

"If people do not see any risk, and see only the prospect of outsized investment returns, they will pursue those returns with disregard for the risks," he stated. "We have to consider the possibility that perfectly rational people can get caught up in a bubble."

And he offered the example of entities such as the National Association of Realtors, "which is conducting a public-relations campaign intended to show that putting money into housing is a reliable way to build wealth," to explain "how even experts could come to believe that housing is a spectacular investment" and fuel the growth of a bubble.

And he warned that the same momentum that fueled the housing surge could intensify the market’s decline.

In his latest book, "The Subprime Solution," published in September 2008, Shiller details the role of the stock bubble in the 1990s and the latest housing bubble in the overextension of credit that spawned waves of foreclosures, bankruptcies and write-offs, among other global financial fallout.

Shiller argues in this book that bailouts are necessary, and that they should be targeted at the low-income victims of subprime lending. He also calls for a major restructuring in the financial markets, with an eye toward squelching the development of future bubbles.

"Shiller suggests that political leaders should look at the current crisis as an opportunity to rethink the home-buying process and add new protections to keep homeowners from getting in over their heads during a future bubble," writes Newsweek.com’s Daniel McGinn in a review.

Dubbed "the new Dr. Doom" by Barron’s magazine, Shiller suggested in an April speech that the damage from this economic downturn could exceed that of the Great Depression. And that "D" word — Depression — has since been taken up by more voices in discussions about the health of the U.S. and global economy.

In a May 2 article by Conde Nast’s Portfolio.com, Shiller remarked, "I always think the opposite of people around me."

That article notes that Shiller’s family has roots in the auto industry — another industry that is seeking a bailout and is reeling from the heavy weight of the economic crisis. Shiller was raised in Michigan, and two of his grandparents had worked at Ford’s River Rouge plant in that state.

As for the fate of the auto industry, he told Portfolio.com, "Maybe American ingenuity will prevail in the end," particularly if the "labor-cost disadvantage as compared with other countries" works itself out as wage costs rise in other nations.

A professor of economics at Yale University, Shiller’s home-price research with Karl E. Case led to the creation of the widely circulated Case-Shiller home-price indices, which compare sales of the same homes over time to gauge price trends.

Their research formed the basis for the monthly Standard & Poor’s/Case Shiller home-price reports, which offer home-price trends for 20 U.S. metro areas. The Chicago Mercantile Exchange operates a futures market based on the price indices.

Shiller since 1980 has been a research associate for the National Bureau of Economic Research, a private nonprofit economic research organization with research contributions from about 1,000 economics professors.

Hear economist and author Robert J. Shiller speak at Real Estate Connect in New York City, Jan. 7-9, 2008. The conference program and registration are available online via the Connect Web site.

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