Shiller: Biggest Housing Boom Since 1890; U.S. Due For Recession

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Nobel laureate Robert Shiller, Yale University professor of economics, discusses Federal Reserve monetary policy and the state of the U.S. economy with Bloomberg’s Joe Weisenthal, Romaine Bostick and Caroline Hyde on “Bloomberg Markets: What’d You Miss?” (Source: Bloomberg)

Robert Shiller: Biggest Housing Boom Since 1890; U.S. Due For Recession

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The overriding message today from Powell was patience and that things are good but there's not particularly any evidence of overheating or some downside risks in the economy and the Fed can afford to be patient. When you look at the overall economy how close to that assessment would you share.

Well the economy has been growing pretty smoothly. And so he's right in where there are some signs though that there might be things amiss. For you know the housing market is soaring and the stock market is high. It's been a long time that we've been in this recovery period and it wouldn't surprise me at all if there was a recession.

Well one of the things that I thought was interesting coming out of the testimony today was Powell seemed to admit. I think what a lot of us know already is that the Fed really does seem to not have a handle on what's going on with the labor market or at least a better way to sort of explain why we haven't seen some of the more traditional pressures bubbled up when you have such a tight labor market. How do you sort of account for what's taking place there when you have unemployment so low but you don't necessarily see some of the inflationary pressures that would normally come along with that.

Well the relation between inflation and unemployment is a famous one. The most famous relation in economics I wish it were a more reliable one. If you look at A.W. Philips early paper. It doesn't fit very well. There are lots of surprises. It has something to do with the way we form inflationary expectations. And it has maybe has nothing to do with inflation targeting that central banks now. Trumpet all the time. So inflation stays at 2 percent.

What should we look at that point of economic data signals that are going to Harbinger the recession. You say that technically you after almost 20 months of recession what would be the record long streak.

Yeah that's an interesting question why do recession just keep coming. Not quite cyclical and the cycle seems to be getting longer. So the 120 month expansion was between 1991 and 2001 recently. So you know maybe these are just gradually getting longer. On the other hand once we pass this and we're in record territory it's going to kind of seem like the market recession is overdue just like it seemed when we had the longest bull market was announced last year in the stock market. People start getting a little edgy about this and maybe it's time for another recession.

Well going back to what you said about the Phillips Curve the one most famous relationships in economics and it's really great except the fact that it doesn't seem to work. What does a central bank do. I mean this seems to be foundational to the idea of a dual mandate balancing price stability along with full employment. This idea that the two are somehow in tension. But look we're at 4 percent unemployment. Inflation has been mild forever. The central bank continues to your fear overestimate when inflation is going to come. So just what does the modern central banker do to try to get ahead of risks for inflation risk.

Well I would say keep. If I were him I would probably do the same thing. Right now the funds rate is you know it's in the range between two and a quarter and two and a half percent with the 2 percent target that putting your real interest rate is the difference between the three rates about 3 to 1 percent. So it seems low but it's not creating inflation. So it would be hard to argue for doing anything other than stay the course at this time.

So Professor Shiller I want to talk a little bit about that because Powell today pretty much made it clear that at least he doesn't think that the idea that deficits don't matter is necessarily one that we should all embrace. When you look at sort of you know government debt relative to GDP I mean it has shot up pretty significantly since the financial crisis it's well above long term averages and I wonder is there a point where it does have to become an impediment to growth rather than something that we can just sort of work around.

If interest rates start going up then the debt the debt servicing will look like a bigger problem. Yeah there's kind of a moral quality toward that. You know you can go into debt for a long time and people don't realize what's happening. They observe us you know all the benefits of borrowing. You go back to Thomas Jefferson you know people said that we have to maintain some kind of stability in our debt. That we've kind of lost sight of that now and I think it's very unfortunate. I agree with Powell. It's something that has to be corrected. Unfortunately the Fed isn't the primary place to do that. It's Congress that determines these things.

I want to turn attention to housing because of course it was today the data that shows that the housing market isn't apps that we are seeing a slowing insignificant when even though we've seen mortgage rates come down is this surprising you and I. What do you think of the housing market. Is this signaling more concern to come more with troughing right now.

The mortgage rate has come down but a little bit. You know I don't know how big an influence that is. There. It strikes me as much bigger than the mortgage rate changes is the fact that we have been going through the biggest housing boom actually the third biggest housing boom since 1890 when my data began. The biggest was from 1997 to 2000. 7. But then before that there was one in the 1940s. But this is the third. It's big. So what's going on here. How can home prices are at record levels in nominal terms. Why did this happen why did it go up so strongly after the financial crisis. There's multiple reasons but it does suggest a little bit of disquiet about home prices and now that are starting to slow down they're starting to fall even with seasonal adjustment corrections. They're falling right now in San Diego San Francisco and Seattle. And other studies other cities are right on the borderline of that. So it seems to me that you know the market has gotten a little out of pace with its job and if it starts falling more that will bring back memories of the financial crisis. Doesn't have a forecast. It's a concern.

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