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Robert Shiller ¬´USA Real Estate bubble hasn’t burst yet¬ª
Robert Shiller, the American economist who foresaw the two major bubbles of the past century, explains the tsnunami in the US real estate sector to our readers.
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Robert Shiller, a Yale Professor, had foreseen the crisis and the burst of the internet bubble back in 2000. After having foreseen these major events, he reconfirmed his acuteness by foreseeing the US real estate crisis in 2005.

Economist, essayist (he is also the Author, along with Akerlof, of the prophetic Animal Spirits), Shiller is also a top notch businessman in the US.
Shiller is also known for the creation of the S&P/Case-Shiller index which is a nation-wide index used to calculate the price of single family houses in the 20 most important urban areas in America. On the last Tuesday of each month, around 9 am (3pm Italian time), America practically stops to have a look at the changes in the value of residential homes registered over the previous two months. The reason for this is that the real estate market is volatile by nature and it is a lever for the economy of the United States. One can get into debt only if the price of houses increases.
The above is proven by the fact that approximately 1.3 billion credit cards have been issued in the US: this means an average of over four credit cards per US citizen, newborns included. If even more proof is needed, one must observe that the average American, a social creature known for being on the verge of bankruptcy more times than not, spends between 60 and 110% more than he or she earns and this excessive expenditure is almost always made by means of a credit card rather than by means of cash.
For the record, the latest study conducted with the S&P/Case-Shiller Home Prices index was conducted on Tuesday, December 29th 2009.
This study presented very few surprises find the complete article and proof of the fact that the American real estate market is still not ready for a comeback; but what could be expected with 3 and a half million unsold houses?

Relax and take it easy Italians! There is no comparison to be made between the American real estate market and the Italian counterparty: the Italian real estate market is surely not a lever for the economy of the Bel Paese. The only thing to be done at this point was to interview the “Animal Spirit” himself in order to have his illuminated opinion on the ongoing economic and financial crisis.

According to Shiller, the US reacted to the crisis of the Thirties by reinforcing its financial system, while Europe punished its own financial system and continued to regret this sorry decision for decades after that. Shiller defends a unique theory which certainly deserves to enter all international political debates: according to this theory, the solution to the problem lies in the diffusion and democratization of financial markets, not in their limitation. During the annual meeting of the American Economic Association, Shiller stated that “we turn to a computer repair center when our laptop ceases to function: this is the kind of role a financial advisor should have”. The meeting we refer to is also the event during which numerous documents regarding financial errors were analyzed and where the use speculators made of these mistakes was unmasked. In order to avoid similar situations in the future and in order to avoid the diffusion of speculations based on fears and negative emotions which undermine the correct evolvement of the market, the financial culture at the basis of modern economies should be reinforced and increased.
This is the goal House Living and Business have chosen to pursue.

According to your past assertions, the real estate market is volatile and has continuous fluctuations.

The real estate market is volatile and unpredictable, especially now. We are at a turning point, at a critical moment in time and our future path is somewhat uncertain.

Why, after the subprime crisis and after an initial decrease in the price of houses, the US has witnessed an increase of these housing prices in 2009?

Prices have actually been witnessing numerous fluctuations since April 2009, especially in the US and in the UK they are increasing.

The «Animal Spirit» concept well applies to the American real estate sector, but, in Italy, this sector is not volatile. In our country (i.e. Italy), real estate properties are considered more an asset than an investment. How can your theories on volatility apply to our markets? – We hereby refer to an interesting article published on December 29th on “Il Sole 24 Ore” under the title “Se il rischio è ancora di casa” that stresses the point on a strong differentiation between the perception of the real estate market in America and the perception of that same market in Italy. find the complete article .

I read that Italy is actually having a boom. I read that your prices are rising!

In Italy, almost 80% of the population owns a housing property, what is the situation in the USA?

The percentage of homeowners in the US was of 69.2% six years ago. This percentage has now gone down to 67.6%.

Americans go into debt in order to purchase real estate properties, but in Italy it is different. Banks do not hand out loans for the economy and Italians do not go in debt by taking out mortgages on their properties…

So what you’re saying is that in Italy you cannot obtain what we call a home equity loan (a type of loan granted based on the value of a house). In the US you can ask for a loan “on” your house. In Italy you cannot go to the bank and declare that you need a loan to go on vacation and then use your house as a guarantee on that loan.

You maintain that those who speculate on real estate properties do it by taking a chance on the political balance that limits the demand for houses. This means taking a chance on the temporary measures politicians pursue in order to respond to the crisis of the economy.

It is true that if governments impede the construction of houses they subsequently provoke an increase in their value. This measure, on the other hand, is not necessarily connected to the fact that the prices of houses have continued to rise. I think this is a misinterpretation on behalf of the public opinion and of journalists. Prices need to go up because we have a limited number of properties and a flourishing economy.

Will there be a limit to the increase of the prices of houses?

The public opinion and the press seem to think so, but this could only seem true because these prices are rising in a very slow manner.

If the Italian government were to limit the use of residential zoning areas, would the real estate markets finally return to stability?

The main issue is how safe the market is. I think people have too much faith in these theories. For example, we have just stated the fact that the prices of houses in America have registered a 30% fall and I think this could also happen in other parts of the world, even if the local governments are limiting the use of residential zoning areas.

Will the offer in this market continue to rise even if politicians pursue these measures?

It is difficult for the government to limit the offer because it always resurfaces in some way. It is difficult, it is like Monopoly. If the Italian government limits the offer in the area surrounding Milan, maybe it could also succeed in limiting the offer, but this offer will resurface in other parts of the country.

You state that banks have taken no precaution against bubbles. Why haven’t they, even if they knew the bubble would burst? Why didn’t the Federal Reserve act up even if it knew what was going on? Why were approximate measures applied?

I think they didn’t understand there was a bubble in the first place. They hadn’t noticed it. They had faith in the financial theorists who talked about an efficient market with pretty accurate prices. Doing this, they weren’t able to see the bubble.

So they weren’t able to foresee it?

Foreseeing something like a bubble is not so simple. It’s not that they totally didn’t recognize it, it’s that they didn’t believe what they saw and didn’t consider it.

What is your opinion in relation to what Pope Benedict XVI said in the first Angelus of the year when he stated that people should not trust economists, magicians and charlatans?

He said that? I had no idea, I didn’t hear that speech. I hope economy becomes more of a science than it really is. That’s the main problem. The fact is that most economist see what they want to see and this means crisis for the economic profession. I have just taken part in an international annual meeting on economy in New York. I took part in a session entitled why weren’t economists able to foresee the crisis? and in another session based on one question: what should we do with economy?. The economists who took part in this event were visibly embarrassed. It’s a real crisis for the category of economists.

The animal spirits live in every one of us: the lie in consumers, money savers, businessmen and governors of central banks. It’s difficult to place the blame because this way of thinking is very diffused.
What do you think of the Degrowth movement and of the Green Economy?

Green Economy, as in sustainable economy, is sort of like a parallel between the economy and the general attitude towards the environment. In the years of the economic boom, people have not taken into consideration their limitations and they have only thought about obtaining what was best for them, without worries. This is what we normally call wishful thinking. Most people in America think there is absolutely no problem with the environment. They think that scientists are wrong and they believe what they want to believe. They think they can become rich and beautiful.Robert Shiller laughs while saying this.

Do you think that an environmentally sustainable economy is possible?

We are running out of resources and we have a critical problem. We don’t have much oil left underground and we are exploiting what we have left. I think we should opt for nuclear energy and I also think that, when we finally do run out of oil, we will be able to develop an environmentally sustainable economy, also because scientists constantly invent new options for us.

So you’re an optimist?

Yes, I am.

What do you think about nuclear energy? Are you for it or against?

The problem here is terrorism. The access terrorists could have to nuclear energy is a serious problem, but maybe we will have no other choice besides choosing nuclear energy. The real danger is that these terrorists gain access to nuclear weapons and then use them against us in a war. It’s highly dangerous. I believe engineers will figure something out, but in my opinion the future of energy in itself is highly linked to nuclear alternatives.

Let’s take a step back. Is your index decisive in the valuation of properties in America?

I don’t know so far, but I think this kind of index will be able to change the real estate market in the future. More and more people, and not only in the US, take an interest in these indexes and new indexes are popping out on newspapers all over the world. These indexes will modify the perception people have of the prices of housing properties. I think people will become more and more speculative studying these indexes and they will start to consider their houses more and more like an investment related risk. These people will start to care about their housing investments and they will consequently start to worry.

If houses are now considered as investments, can they be compared to investments made on the stock market?

This is an interesting question. In the past, and by that I mean 10-20 years ago, there was no link between the stock market and the real estate market. These two entities had a tendency to move in different directions. Recently, they have become more and more connected and the prices of real estate properties fluctuate up and down in the same direction as the shares offered on the stock market. I think this change reflects the fact that now people see real estate properties as investments. Yes, I guess we could say that the prices on the real estate market have a tendency to follow the stock market.

Moving on to the «Animal Spirit»‚Ķeven those who govern countries are driven by irrational motivations, by psychological issues, just like the consumers, the money savers and the real estate agents they rule over.

The animal spirits live in every one of us: the lie in consumers, money savers, businessmen and governors of central banks. It’s difficult to place the blame because this way of thinking is very diffused. Think of it this way: if you visit a country that is witnessing a war, it is very hard to figure out who to blame for the beginning of that very same war!Shiller laughs again The difficulty lies in the fact that everyone shares the same opinion, even if it might be the wrong one. This is what we commonly call the business cycle infatuation.

Politicians should act as referees in the economy, but how can they? Should they really try to maintain a certain balance in the economy?

There is some truth in your statement. Recently, about a couple of years ago, people would have said that the governors of the central banks shouldn’t have tried to express their opinion in relation to the real estate market and in relation to the stock market because they do not have knowledge of these two entities. This is what people used to say. On my part, I think these central banks should become “philosophers” of the economy. They should take their time and make a better use of the resources that do not work and really try to understand what is going on. If we don’t let them do this, no one else will help people make sensible decisions.

So the Government should be an active player in the economy? Should it try to stop the mechanisms of pure free trade?

This is a very difficult question to answer Shiller laughs once again. I think public figures such as the representatives of central banks or of governments should have some kind of responsibility in openly saying there is a bubble in the economy and in telling everyone what is going on. This is a useful strategy in order to take action and stop the bubble. Regulating the market in order to prevent the bursting of the bubble is what should happen in economic markets. We need people with a public responsibility in monitoring these situations, we need people who talk about these bubbles and who actively reduce their dimensions. If we lack public leaders who try to prevent these bubbles from surfacing in the economy, I really doubt the businessmen men of the private sector would take action in their place. Governments should have this active role and they should reduce the dimensions of any kind of economic bubble, even if this is done in an imperfect manner. This is basically what should happen.
I think the world of financial prices is very complicated and there are many other things which should be done. This is one of them. We should definitely have governments that take an interest in the entire economy.

Do you think governments should be afraid now?

I think they are less afraid now that they were 5 years ago. 5 years ago, economists would have told governments that they shouldn’t try to have an active role in the economy based on the principle that the governments are not the ones with the brains: the economists have the brains, so governments should mind their own business. Recently, during the G20, economists have rethought the idea of regulated economic systems. There is now a new idea in relation to the economy: now, people seem to think that we need interested and active governments which worry about the real estate bubble.

By saying this, do you mean that we need an ethical government?

No, all I refer to is the current state of the economy and it’s nothing so radical. All we need is a government which “talks” to its people and takes active measures for the reduction of the bubble. We really need this against the threat of the real estate bubble.

With regards to Italy, do you know this country? What do you think of its economy and of its government?

Shiller laughsI read about these issues on various newspapers. I do not deal with the Italian market. All I know is that there is a world that is developing and that this world is becoming stronger by the day. What I understood is that the history of Italian economy is traditionally full of small manufacturing companies with a good structure.

Have you been contacted by other members of the Italian press?

Yes, on many occasions. 5 years ago, for example, I was contacted for a conference on the Italian economy in Milan. I said something positive because Italy has always had the longest history of economic success in the world. The Italian economy has its origins in the history of Ancient Rome and the history of its success has no equals. I am optimistic in relation to the future of the Italian economy. Everything has its origin in the intellect of people and Italians are one of the most intelligent and creative populations in the world. I consider these qualities decisive in work too.

Our TV stations only contact American economists who support free trade…

Professors tend to be liberal mainly because they are professors and not businessmen. I have personally started up a couple of business activities. I am the owner of a company called MacroMarkets so I have a direct connection with the business world and in any case I think we need a market economy.

What do you think of Noam Chomsky’s analysis of today’s capitalism?

He is very liberal. I am quite different from him. I am “in” the government, but I still consider this to be an interesting issue. I thinks governments should behave like the referee in a soccer match: they should make sure that everything is done in compliance with the rules, but the game is made by the players, not by the referee.

You have foreseen the two great bubbles of the past century. Will the green economy be the next bubble?

Shiller laughs againIt’s very difficult to say. I think we are still not done with the current bubble which is still in its bursting process. I am not in the position to identify the next bubble just yet. All we can say is that the prices of houses are continuing to rise and so are the stock market prices. The thing is even I still do not know what direction this is all going in, so I am not able to make a reliable forecast on the future of the economy.