NEW YORK — It’s beginning to look a lot like 1930s, and the nation’s latest dive in home values and stock values is a very serious matter that will likely be with us for awhile, says economics professor and author Robert Shiller.

NEW YORK — It’s beginning to look a lot like 1930s, and the nation’s latest dive in home values and stock values is a very serious matter that will likely be with us for awhile, says economics professor and author Robert Shiller.

"The real puzzle is that no one saw it," said Shiller — a Yale University professor and author of "The Subprime Solution" and "Irrational Exuberance" — during a presentation Wednesday at the Inman News Real Estate Connect conference in New York City.

"It may look comical, the mess we’ve gotten into, if it weren’t so tragic."

Why were so many financial wizards and the public at large blindsided by the nation’s latest financial catastrophe?

Part of the reason, Shiller said, is that the Great Depression "happened so long ago that it seems like ancient history."

While finance and real estate theories have become far more mathematical and statistical in modern times, Shiller said, "the data that we typically use doesn’t include some of the big historic episodes like the Great Depression."

This latest boom and bust cycle represents another huge event, he said. "There’s nothing quite as dramatic as this (economic downturn) except the 1920s boom and the Depression that followed it."

Percentagewise, the stock market lost about 80 percent of its value after the 1929 crash, Shiller said, while it lost about 50 percent of value in the latest crash.

"You can say it’s not as bad — but maybe it’s not over yet," Shiller said. "That’s the thing I’m worried about. We definitely have been through a remarkable market movement that is unparalleled."

Shiller believes that irrational behavior — a recurring weakness of human psychology — is to blame for building up bubbles and busts in the real estate and stock markets.

"People don’t like to hear this: that irrationality is driving things," he said.

"My view of human nature is: Yes, we’re very rational about certain kinds of things. The human species is able to do amazing things, but (we) also make amazing mistakes."

He said that excitement and hype, driven by word-of-mouth communication and media attention, can fuel bubbles (see Inman News).

How can the damage from the housing downturn be undone?

"Unfortunately, it’s not so easy to do this. It’s a little bit like psychotherapy that we all need to be corrected. We have an emerging crisis and I think we have to do things immediately that may not deal with the psychology behind it, but it’s the best we can do," Shiller said.

Shiller said that the massive federal intervention to rescue the financial markets has been mostly good medicine but the dose is too small.

"We’re doing the right thing but we need more of it," he said, adding that talk of a new massive financial stimulus plan by the incoming Obama administration "might only be the beginning" of solutions for the current crisis.

The placement of secondary mortgage market giants Fannie Mae and Freddie Mac into a conservatorship was a necessary step to avoid a faster collapse in the housing market, Shiller said.

Shiller wants to see some radical changes to the mortgage market, such as the creation of mortgages with built-in mechanisms for workouts when the economy is in a recessionary period.

Also, he proposes federal subsidies to support financial adviser services for the public at large. "It would be ideal that every family has a financial adviser committed to helping them with broad and long-term problems — something like a physician who stays with you and who has long-term loyalty to you."

The lack of finance education was a contributor to the latest economic disaster, Shiller said.

"To me it seems like part of the problem that caused the mess we’ve gotten into was that people were not getting advice. Investor education is a good thing."

He likened this insufficient education to a scenario in which the "medical professional didn’t exist and all we had were drug companies with salespeople" who were not upfront about the best treatment.

"We need to deal with the foreclosure problem," Shiller said, noting that foreclosures are putting millions of residents out of their homes, are "damaging (to) a family’s sense of well-being and leave lasting scars. I’d like to see them prevented."

Shiller advocates for a robust futures market to help hedge against dramatic fluctuations in home values. In fact, such futures markets already exist, and Shiller worked to develop one of them based on the Standard & Poor’s Case-Shiller home-price index (which he also helped to create).

"We need more hedging of risk," he said, adding that MacroMarkets LLC, a company that he co-founded, is working to launch a real estate securities product called MacroShares this spring.

Asked for investment advice, Shiller said it’s a difficult time and investment decisions should be based "on your age and circumstances. We are in a very uncertain time. People who are retired (and) living off their wealth should be really careful right now."

***

What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.

Show Comments Hide Comments
Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Success!
Thank you for subscribing to Morning Headlines.
Back to top
Only 3 days left to register for Inman Connect Las Vegas before prices go up! Don't miss the premier event for real estate pros.Register Now ×
Limited Time Offer: Get 1 year of Inman Select for $199SUBSCRIBE×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription
×