Leading Economist Says Crisis May Run for "Years and Years"

Bloomberg News is running a video of leading economist Robert Shiller sounding a great deal more pessimistic than anyone so far named to the Obama team. Shiller's views add to a solid minority of opinion that is profoundly pessimistic about American prospects.

This is the Shiller of the Case-Shiller Home Price Indeces. He is a leading figure in behavioral finance, hypothesizing that investors' and traders' decisions "are often driven by emotion instead of rational calculation." For over twenty years, he has repeatedly and correctly challenged the orthodoxy, accounting for market downturns, particularly in 1987 and following 2000.

In addition to the Bloomberg coverage, the Wall Street Journal reports that the "U.S. Housing Slump May Exceed Great Depression":

Yale University economist Robert Shiller, pioneer of Standard & Poor’s/Case-Shiller home-price index, said there’s a good chance housing prices will fall further than the 30% drop in the historic depression of the 1930s. Home prices nationwide already have dropped 15% since their peak in 2006, he said.

“I think there is a scenario that they could be down substantially more,” Mr. Shiller said during a speech at the New Haven Lawn Club.

Mr. Shiller, who admitted he has a reputation for being bearish, said real estate cycles typically take years to correct. Home prices rose about 85% from 1997 to 2006 adjusted for inflation, the biggest national housing boom in U.S. history, Mr. Shiller said. “Basically we’re in uncharted territory,” he said. “It seems we have developed a speculative culture about housing that never existed on a national basis before.” Many people became convinced that housing prices would increase 10% annually, a notion Mr. Shiller called crazy.

I am consistently astounded that thinking like Mr. Shiller's can be considered wrong, even obviously wrong.

Remember "Dow 36,000"? Remember the endless nightly news reports that characterized any market decline as "a correction" and any increase as proof that we had entered a new economy, where there would never again be prolonged declines?

John Kenneth Galbraith reviews the history of this pattern of absurdity in "A Short History of Financial Euphoria".

What strikes me as painfully obvious is that no price can continue to rise without limit at a rate that will exceed the capacity of people to pay. Now, that is almost certainly an oversimplification. Fine jewelry may rise who knows how much simply because the people who buy it — fantastically rich to begin with — simply never run out of money to pay for it.

But housing? In New York City, a huge percentage of people pay 30%, 50%, even more, for rent or for mortgage. The annual increase in those payments simply cannot grow continuously at a rate that will result in people owing more than 100% of their income.

But take the average renter. Consider his or her annual rental increase. Even the increase set by the Rent Guidelines Board regularly exceeds the rate of inflation, exceeds the rate of increase in renters' incomes. Rents for those not in stabilized housing drastically exceeds inflation and wage increases. This is patently unsustainable.

New York City, and many other places like it, have counted on

1. a constant influx of people who can pay and
2. the willingness and ability of those unable to pay to move further away while continuing to work in the city.
   

But that only delays the tipping point. And the delay is modulated by the indifference of government to the obvious and inevitable. So, for example, commuting costs cannot continually be increased when the people who face those costs are exactly those who moved to reduce costs in the first place. (Never mind the minimal or non-existent attempts to make an inconvenient and usually unpleasant commuting experience more tolerable.)

My own opinion is that the single greatest problem we now face is the gross inability of those in power to contemplate or grasp the circumstances of the rest of us. Commuting, taxes, infrastructure, education, healthcare are all developed with no eye at all to the conditions of average citizens. Lip-service is paid. Heads are noddd. Grim faces adopted. But ultimately, even the erstwhile "good guys", like Representative Charles Rangel of New York, today identify themselves with the privileged. They certainly lead privileged lives. So, too, do the leading figures of American media.

A combination of circumstances are now making impossible the practical indifference of "leaders". That is, leaders have been rhetorically concerned, they say the right things (to the extent needed to get reelected). But in practice they do little or nothing to alleviate the crushing burden of regular expenses — especially in housing, energy, food and healthcare — the necessities.

Moreover, they frequently let slip the near-contempt (in not outright disdain) they feel for us. Witness Charlie Rangel's initial response when his financial and housing shenanigans were made public. He was genuinely taken aback when his own constituents bared their rage in his presense — the sign of a man long divorced from any understanding of reality.

The combination includes the housing bubble (preceded by the tech bubble just a handful of years before), the obscene war which now has cost us who knows how much (Joseph Stiglitz and others estimate one trilllion), the decades of deliberate, even malicious, undermining of public institutions like social security, health care, education, the environment, etc.

The US government has systematically and profoundly failed to serve the interests of the people. I, for one, am increasingly of the view that Obama merely did a great job of paying lipservice. His choices for high-level positions — particularly the total exclusion of progressive or really liberal opinion — are entirely in keeping with the utter indifference that has characterized Washington at least since the Reagan years.