Shiller: “No one can prove that growth plummets when debt is over 90% of GDP”

Will Robert Shiller get the Nobel Prize this year? He is always ahead in the polls, and yet he never wins. If he does, it would be the perfect culmination for this 66-year-old economist. Born in Michigan, Prof. Shiller is a convinced Keynesian, Finance teacher at Yale and the father of behavioral economy.

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His name is a constant in the media every time the S&P/Case-Shiller Home Price Indices–a crucial indicator of U.S. real estate sector–is published.

Prof. Shiller is author of Finance and the Good Society, a book that does something completely unusual nowadays: defend the financial sector. He is a Keynesian who voted for Obama, the same man that said in 2005 that the U.S real estate was growing unsustainable and who is regarded as the worst enemy of those who defend the efficient market theory. And yet he is defending the market.

Finance and the Good Society is a long book that does not aim to reach the main public, but he suggests that the financial sector would be redirected to serve the ordinary people and help them protect themselves from risk. Which is not an easy task.

Many of Shiller's recommendations are at odds with what the finance industry does today, and it seems that neither regulators nor market participants are willing to follow him. Even if he finally gets the Nobel.

You've written a lot about bubbles. The Federal Reserve has launched a new plan to buy corporate bonds in order to inject money into the economy and stimulate job creation, which adds to the 'Operation Twist', public debt swap debt for short-term debt. Won't this create inflation and generate new speculative bubbles?

The Federal Reserve should not have the control of asset prices among its goals, so the 'bubble' does not fall within their responsibilities. Moreover, we are far from a 'bubble' in the U.S. We may be starting one … you never know, but the fact is that it does not seem like it.

The Federal Reserve policy–including the announcement that it will maintain ultra-low interest rates for six months, until mid-2015–is not, in itself, reason to have more bubbles. What the Fed has achieved with the two previous operations of 'quantitative easing' has been to leave the interest rate of the average mortgage at 3.5% instead of 4.5%.

You have defended public spending as an economy stabilizer. And you seem very critical with Kenneth Rogoff (Harvard) and Carmen Reinhart (University of Maryland) theory that, when public debt reaches 90% of GDP, growth suffers.

It seems that you don't like too set strict financial goals. These two ideas-government spending in times of crisis and pragmatism- are Keynesian.

I think it's a mistake to turn certain numbers into goals. In Europe and the United States this is sometimes a trend in public debate, and that cannot be good. Because reality is different from those goals. Rogoff and Reinhart analyze public debt related to GDP by dividing it into different sections: from 0% to 30% of GDP, from 30% to 60% of GDP, from 60% to 90% of GDP, and more of 90%. And their conclusion is that from 90% of GDP debt severely hampers growth.

But their own data show the contrary: the higher the debt, economies grow less, but this applies in any section. Also, why four blocks instead of five? Why not another block from 90% to 120% of GDP? Or another from 120% to 150% of GDP? Finally, how do we know that we are not making a causality mistake? Is debt causing GDP to grow less, or is that when GDP grows less debt increases more?

You strongly defend the financial sector in his book. But you also suggest a series of family-oriented products to reduce the risk that banks and funds will not sell unless they have the support from the authorities.

However, it seems that governments will not support banks launching new types of assets even if they are ordinary people-oriented…

In the United States there has been much innovation in the financial sector through government action in recent years. The 'Consumer Financial Protection Agency' and the Office of Financial Stability (a Federal Reserve agency that oversees the entire financial system) have been created. But there hasn't been a breakthrough like the Great Depression's yet.

At that time, people had short-term mortgages, and had to refinance every few years. This created a lot of risk, and caused mortgage rates to be very high, so the government started to buy those mortgages from the banks. Thus the ground was set for what would become Fannie Mae and Freddie Mac (two companies that used to buy mortgages under guarantee and were nationalized by George W. Bush in 2008). We have not been able to do that.

Instead, we bailed out the banks and left people on their own.

Bank bailouts are needed in many cases. In Spain's case, I'm glad yours is running. But we do need lobbyists for normal people. People feel marginalized in favor of the financial industry.

The main argument of your book looks a little like Saving Capitalism from the Capitalists, which is the title of Chicago's Luigi Zingales and Raghuram Rajan, another best-seller.

Yes. I wrote a laudatory review of that book. And you know what happened now? Zingales has written another book–'A Capitalism for the People', in which, for example, describes the banks bailouts of banks as a form of cronyism too close to corruption. I agree with that. I think we should critizice that the last Bush Treasury Secretary's Hank Paulson nationalized AIG partly to save Goldman Sachs, which was the investment bank he had run up a little over two years before.

But my support to Zingales has also had a funny result: the publisher has made positive comments on the back cover of the book, and has placed mine next to Paul Ryan's, the Republican candidate for vice president of the United States-so now I look like a Republican!


About the Author

Pablo Pardo
Pablo Pardo is Washington DC correspondent of El Mundo. Journalist especialized in International Economics and Politics.