Lecture Alert - The Subprime Crises by Professor Robert J. Shiller (Yale/irrational exuberance fame)

/ Wednesday, November 26 /

Above is probably one of the world's first book signings on an ipod. I bought Prof. Shiller's book on amazon a week ago, so i convinced him to sign on my ipod during his book signings after the public lecture today since i didn't want to buy another book. The que was so long, i believe he might be still signing while i write this now.

The lecture was fairly short but covered a few interest points. First, it was also a first for a lecture, at least when i have attended to show a disclaimer slide before the proceedings started.

Prof. Shiller wants us to think outside the G20 communique on the causes of the subprime crises. Immediately he went on the political road (with OBAMANIA, who can blame him?) and blasts the Treasury Secretary-elect Timothy Geithner for failing miserably and having no clue about the crises before the bubble burst. Shiller is probably right here, since he served as an advisor to the NY Fed until recently. Why did he leave? Well, if someone keeps bringing up the possibility of bubbles bursting in the ancien-regime what is known as the NY Fed, people look the other way. This is what happened when Timothy Geithner, protege of Larrry Summer brought his "own crew" to the NY Fed and Shiller had to leave. I never got the chance to ask my question during the lecture on what his thoughts were on who should have been really offered the Treasury position.

Moving on, Prof. Shiller changed tracks and argued a lot of problems today were due to "Group Think" - a concept in psychology where people, in this case very ambitious people who try to minimize conflict and reach consensus without testing ideas properly.

He states the emergence of a strong civil society is very important in such a crises.

Later, he recalls how much Keynes is relevant today, who not only was the architect of post WW1 world economic order but a man he deeply admires (Shiller is already working on a new book called Animal Spirits with George Aklerof based on Keynes original animal spirit thesis

"A general bonfire is so great a necessity that unless we can make of it an orderly and good-tempered affair in which so serious is done to anyone, it will, when it comes at last grow into a conflagration that may destroy much else as well."

Maynard John Keynes (The Economic Consequences of the Peace, p. 160)

Sources of Bubbles -

1. Perception
2. Amplification mechanism
3. Cultural factors
4. Psychological factors

What solutions are on the table to fight this subprime crises mess?

US and UK are leading the way in following the Keynsian debt stimulus package. But will such a fiscal stimulus work?

Shiller believes that the Keynesian multiplier is too old to suggest it would work fine. He believes Alister Darling's recent budget proposal of borrowing 20 billion pounds while announcing increase in taxes in two years time concomitantly was stupid. Expectations always play a big role in this world.

Prof Shiller proposes a few solutions of his own -

Creating clearing houses for debt could be a way of dealing with systemic crises. Bailouts are always an option as well.

Long term solutions he proposes -

1. New information infrastructure

- comprehensive financial advice for the poor (just like what rich wigs get when they enter a wealth management office: look at the big picture)

- new financial watchdog (Howard Davies was the chair for the lecture, and should have pointed out how badly his Alma-mater the FSA failed in the UK)

- Default option financial planning

- improved financial disclosures

- improved financial database

- new system of economic units of measurements for the economy.

- CONTINUOUS WORKOUT MORTGAGES: a term he devised in the book where govt. offer incentives for banks to continuously renegotiate with clients in times of peril.

Finally, Prof. Shiller gave a bit of useful advice: the FINANCIAL GURUS that are on CNBC, Bloomberg everyday are really not that special. He thinks the NY taxi driver that dropped him off at the airport when he was travelling to the World Economic Forum this year probably knew a lot more than most participants he met there. (Honest admission and a thunderous applause swept the Old Theater.)


Old Theatre
26 Nov 2008
Copyright © Gaurav Monga