L.G.: That's not been a problem of yours, because you're not part of that particular group.
R.S.: I'm an academic, and academics have a tradition of standing up more. Even so, this groupthink happens even in academia. But I think that's actually something about my personality. I always think the opposite of people around me. My wife complains about that. She said, "You always have to take the other side." And I said, "But on the other hand...." My wife's name is Virginia, but I call her Ginny. She's a psychologist.
L.G.: So you often take the opposite side of what she says.
R.S.: Right.
L.G.: Like that old Monty Python routine: "This isn't an argument. It's just a contradiction!"
R.S.: I imagine so, yeah. So what would that be? That's sort of an oppositional personality.
L.G.: But presumably you say these things because you have cause to believe them. You're not just being contrary. You actually did believe that there was going to be a bust and that there were too many subprime mortgages out there. But what's surprising to a layman like me, who knows nothing about this, was there were so few people who were willing to analyze that. And you were not only saying it-you were actually trying to get people to do something about it. And no one listened to you at the time.
R.S.: No, I think they started to listen. Everything happens with a lag through time. So for example, the O.C.C. [Office of the Comptroller of the Currency] did eventually issue guidance, but it took them a while.
L.G.: Now Alan Greenspan has been taking a lot of heat for his alleged role in all of this. And he recently tried to mount a sustained defense of himself. You probably saw that.
R.S.: I saw a Financial Times piece.
L.G.: Well, he's been doing it everywhere—I saw it in the Wall Street Journal. He's gone on a self-defense campaign.
R.S.: Yeah, that's probably a good thing for him to do because people thought he was a genius. He got out in 2006, which was almost exactly the peak. So he timed his departure right. But now he's out, and he didn't anticipate this. Even if you look at his autobiography, it's not there that he anticipated this crisis.
L.G.: So do you think he deserves some of the credit, or blame?
R.S.: Well, I actually think he's a very smart and well-meaning man, but I have differences of opinion and so I can't fault him for that. I don't think he was dishonest. I think he was calling it as he saw it. I guess as a Fed chairman, you do have a little bit of a bias toward optimism. Because if you say anything vaguely pessimistic, it gets you in trouble. In fact, the reason why the term irrational exuberance is famous—and people forget the reason for that—is because when he uttered the words, the stock market crashed almost immediately. He did this talk in the evening, and the U.S. markets were closed, but the Japanese markets were open—and they crashed immediately. So that was the news story at the time. He just utters the words irrational exuberance, and that just causes a cascade.
L.G.: Just two words in a very long speech.
R.S.: Yeah, I told you about my experience yesterday [April 22]-a few words in my speech at the New Haven Lawn Club somehow got amplified. [In a breakfast talk that made doom-and-gloom headlines nationwide, Shiller warned that the housing market slump could be worse than the 30-percent price drop of the Depression, requiring bailouts for millions of homeowners. "I think there is a scenario that they could be down substantially more" than the historic slump of the Depression, Shiller was quoted as saying.] They took from my speech that I was saying that the home-price declines could exceed those of the Depression. And that's it. That was the story. I don't even really remember what I said exactly, but it was a comparison I might've made in the course of making this presentation.
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L.G.: It's known obviously that you have—coming up on two years—these housing futures. And you said when you started doing this that there'll be other instruments. So you're doing another one of those. We don't know what it is. You can't talk about it during a quiet period. But talk about what's already there. How's that doing?
R.S.: Well, we have a futures market. I have a chart of the open interest. It rose from nothing at the beginning to over a hundred million dollars, and we were very optimistic.
L.G.: How many trades did that represent?
R.S.: I don't have the numbers.
L.G: I saw something that initially it was like 2,000 some-odd trades.
R.S.: Well, each trade has a notional value of $60,000, and it seemed to me that generally the highest it got for a day was about 100 trades. So that would be $6 million—I'm not sure I remember that exactly right. So if you added up the total volume of trades, I thought it was something like $600 million.
L.G.: So the volume of the trades sort of slacked off a little bit?
R.S.: That's right. Because [the housing market] is in decline, yeah. I'm hopeful that it will come back.
L.G.: Right, but already you've bested the London FOX [the London International Financial Futures and Options Exchange, which offered property futures from May through October 1991.]
R.S.: That one ended totally in a few months [in a scandal involving the artificial manipulation of trades].
L.G.: Have you ever considered scandal futures?
R.S.: [Laughs] No.
L.G.: Tell me, what do you call your futures?
R.S.: The Chicago Mercantile Exchange Housing Futures and Options.
L.G.: Tell me what function they serve.
R.S.: Well, futures markets are open to the general public. However, most of the general public don't trade in them. They're considered sophisticated instruments that usually are left to professionals. But there are some individuals who do it. So I suppose I should say what I think professionals would do with them mostly. And that is, they would then want to use them to help them create retail products that would help individuals. I call them continuous workout mortgages. So you can develop a mortgage whose balance reflects the change in price of your house, so that you can't get your home equity wiped out, and you can't end up underwater, as has happened to so many people now. If mortgage lenders had a futures market that was deeper than the one we had, that was more liquid, then they could write such mortgage policies and then hedge themselves from any implied risk. So we thought of them as an infrastructure for developing better financial instruments.
L.G.: That would theoretically reduce foreclosures to a lower level. Theoretically, it would be zero.
R.S.: Well, there would still be some, but for other reasons.
L.G.: People who were just incorrigible, stopped paying entirely-but people of good faith and good heart who are actually trying to pay their mortgages would benefit?
R.S.: Right. That's why I'm writing another book now. This is a time when I've been having trouble getting people to appreciate the advantages of these kinds of things. But now, this is a time when they might suddenly see it. So I wrote a New York Times column some months ago pointing out that the '30s was a time of great innovation, and it was because people saw the crisis. What people saw in the '30s was a deterioration of faith in our government and institutions, because people saw that the Depression was happening and nothing was being done about it. And so, this gave—actually, the Hoover administration as well, but mainly the Roosevelt administration—the heart to make big changes.
L.G.: Have you managed to persuade anybody in a position of power—a legislator or the Treasury Department—that this idea you have of continuous workout mortgages is something that should be enacted?
R.S.: This is new. This is going into my book. Although in 2003, I had a different name for it. I called it income-linked mortgages, and I had home-equity insurance attached to mortgages. So I have a new name for it. But it's the same concept.
L.G.: The mortgages can be renegotiated according to what the market is doing, and it's done on a continual basis, not an emergency basis. And then the financial institutions are hedging their risk with these instruments?
R.S.: Right.
L.G.: You know Chris Dodd [the Democratic senator from Connecticut who is chairman of the Senate Banking Committee]. I'm assuming he's a friend of yours. He's your senator.
R.S.: I have never met him. I have to call him up and try to meet him.
L.G.: You really are an academic!
R.S.: Yeah, I know. I've talked to his staffers. I've talked to Barney Frank [the Democratic representative from Massachusetts who is chairman of the House Financial Services Committee] about this.
L.G.: What is Barney's reaction?
R.S.: He has his own plan. But, you know, I should contact him again, now that you mention that, because I want mine attached to his plan. And whether that's a possibility, I don't know. It's a shame that our presidential election campaign has Barack Obama and Hillary Clinton trading insults instead of talking about these issues.
L.G.: And John McCain has sort of talked a bit about it. All of them have put forward some kind of proposal.
R.S.: There's some idea that there should be a bailout, which I agree with. I think it's obvious that something has to be done about people who otherwise are going to be thrown out of their houses. This has been obvious to lawmakers. Every time there's a financial crisis, going back to the early 19th century, they realize that you don't just let millions of people get thrown out of their houses, thrown into debtors' prison. We're not going to let that happen.
L.G.: Have you heard anything you like so far about any of these three? McCain? Obama? Clinton?
R.S.: Um, I'm not involved with politics at the moment. Whichever one wins the election, I'll work with.
L.G.: Sounds like you are involved with politics!
R.S.: I'm not mentioning any of them in my book.
L.G.: Well, good. Then we can talk about them without fear of scooping your book.
R.S.: But I didn't want to mention them because I think when the book comes out, that'll be almost over.
L.G.: Well, it may not be over. But do you get politically involved? Do you give money to candidates?
R.S.: Generally, I'm not that involved.
L.G.: Have you contributed to anybody's campaign?
R.S.: A little bit—basically not. I don't want to get into that. Let's say I haven't, basically not. It would've been trivial. [Federal Election Commission records show that Shiller gave $300 to the Democratic Congressional Campaign Committee in November 2006 and $500 to Connecticut senator Joe Lieberman's presidential campaign in January 2003.]
L.G.: This idea of "the ownership society" which George W. Bush has touted—you treated with skepticism. Why?
R.S.: I think it has some merit. In fact, the promotion of homeownership is a very important, stabilizing force. The Federal Housing Administration and the Veterans [Benefits] Administration have helped people of low income and also people particularly of minority status become homeowners. If we had a nation where low-income and minority people were all renters, I think it would have a different psychology. They feel more like part of this nation when they own a home. It is a good thing.
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