Seattle Bubble

Increasingly-famous economist and housing market sage Robert Shiller spoke in Seattle this morning at a business breakfast downtown and this afternoon at Seattle Pacific University. Mr. Shiller’s presentations focused on the role that psychology plays in economic markets, a topic that he explores with co-author George Akerlof in their recent book Animal Spirits.

The morning session consisted of roughly thirty minutes of prepared remarks given to a crowd of about 1,400 local business leaders and people with ties to SPU. The afternoon session was about an hour long, and was more interactive event at a smaller venue with the capacity to seat only a few hundred. After giving a condensed version of the same presentation from the breakfast, the floor was opened for a question-and-answer session.

Dr. Shiller’s primary thesis is that economic markets are strongly influenced by psychology that seems rational to individuals, but on the whole is “collective madness.”

He referred to the notion that prevailed during the housing bubble that home prices never go down as laughable, and said that the ideas that housing is an “amazing investment” and that you can be “priced out” are not supported by the data.

One amusing part of the afternoon session was a story Dr. Shiller related about a localized Los Angeles housing bubble in 1885. In describing the mentality in 1885 Los Angeles, he said that people thought “Los Angeles is special!” He also quoted from an article in the LA Times which was published during the aftermath of the collapse in 1886:

We Californians have learned something. And that is that home prices can’t just go up forever—they have to be supported by something. Never again will Californians make this mistake.

Regarding government bailouts, Dr. Shiller likened the economy to a sinking ship (specifically the Titanic), saying that “we just have to try something,” and “I give them credit for trying.” [Update: As I understood him, Dr. Shiller was proposing that we “try something” not to re-inflate the bubble, but rather to soften the blow of the bursting bubble, and to prevent the opposite of “irrational exuberance” from driving the nation and the world into a massive over-correction that could last for decades.] He also suggested that more should be done to prevent foreclosures, due to the psychological impact of losing one’s home.

After the afternoon session, Ray Pepper (500 Realty) and I were discussing the psychological implications and the moral hazard inherent in mortgage principal reductions, which Dr. Shiller seemed to be promoting. Ray asked Dr. Shiller about this, and he responded that “I’m not a fan of it in the long run, but maybe in the immediate crisis, because people are in trouble.” His ideal solution would be something he calls a “continuous workout mortgage,” where a workout (principal write-down) is pre-specified and priced into the mortgage from the start (a concept described in more detail in his book The Subprime Solution).

Although he declined to give any specific forecasts, the feeling I got from his comments were that Dr. Shiller believes home prices will return to their long-term, inflation-adjusted historical levels, both nationwide and even here in Seattle.

For anyone interested in hearing the entire afternoon lecture, you can listen to it right here:

Feel free to also download a pdf of my barely-legible notes, in which I embarrassingly and inexplicably misspelled Dr. Shiller’s name. Or, for those of you that are really adventurous, you can view an interactive version of my notes indexed to the audio of the event.

If anyone would like to hear the morning lecture, I have a recording of that as well, but the quality is relatively poor due to it being such a large room. Let me know and I will post a link in the comments.

Aubrey Cohen also has a write-up of his take on the morning event here: Put down the instant coffee: Economist warns of depression mindset