Yale professor Robert Shiller may be an economist by profession, but his talk at IMCA’s annual conference was all about psychology. Trying to explain the worst economic crisis since the Great Depression, Shiller — best known as co-creator of the Case-Shiller Home Price Index — told an audience of some 2,000 financial advisors meeting in Las Vegas that a lack of confidence lies at the root of current economic weakness. Shiller also predicted a decade of low average stock market returns.
It is the “story” behind the statistics that accounts for the ups and downs of our economy, Shiller said. The story that home prices continued to appreciate in value fueled an acceleration of home purchases through most of the last decade. The first signs of trouble — ignored by most market observers — actually emerged in 2005 when statistics on the number of people visiting new homes fell dramatically, leading home builders to seek fewer housing starts. It was probably at that time that the story subtly changed to one of “suckers” buying homes selling at peak prices. Eventually the bubble burst and the story changed to one of anger and dismay at falling prices, which led to a lack of buying plaguing housing markets to this day.
The key part of the narrative suppressing confidence today is long-term unemployment that is nearly twice as high as the previous peak during the recession of 1981. Not having a job or the prospect of a job has all sorts of baleful consequences, from the obvious economic ones to the possibility of extreme political movements. “Confidence drives the economy,” Shiller noted.