In a famous statement before Congress at the height of the stock market in the 1990s, Fed chairman Alan Greenspan depicted the attitude surrounding the market as one of “irrational exuberance.” How do things stand today, a few years later? In February 2003, economist Robert Shiller offered an answer to a large group of professors and students who filled the Von Canon lecture hall. His lecture, titled “Beyond Irrational Exuberance,” was part of the department’s Distinguished Lecturer Series, sponsored by the Allen Starling Johnson Jr. Fund.
Shiller, who is Stanley B. Resor Professor of Economics at Yale University and author of Irrational Exuberance (Princeton University Press, 2000), began by discussing the evidence for and origins of the stock market bubble of the late 1990s, the current bubble in real estate valuation, and the outlook for the world economy as a whole. Using historical charts of stock market returns for the United States and other countries, Shiller emphasized the magnitude of the recent stock market bubble, which was unprecedented in recent history. Moreover, the bubble was not unique to the United States; rather, most of the countries around the world experienced a bubble during the later part of the 1990s. One notable exception was Japan, which experienced its own stock market bubble a decade earlier.
One of Shiller’s main points was that stock markets are not so much affected by external events (such as the millennium in 2000 or the war with Iraq) as by the internal mechanisms of the market. It is impossible, in his judgment, to pinpoint singular causes of bubbles. That is, although the Internet and technology stocks surely played some role in the bubble of 2000, they were not the predominant factors, since the bubble was primarily caused by a conglomeration and amplification of numerous smaller factors. Thus, Shiller is not particularly concerned about the effect that geo-political events will have on the market, especially since the recent bubble was so unusual that its long-term impact on the markets will outweigh anything else for years to come.
The biggest actor in market fluctuations, Shiller argued, is investor psychology, implying that the market generally behaves irrationally and cannot be predicted. This is what makes bubbles so difficult thing to recognize, for if markets are truly irrational and unpredictable, then one can only recognize a bubble ex post facto after it has burst. Although we can argue that markets are overvalued, there is not much good in trying to predict when bubbles are going to burst, since the market is inherently driven by irrational psychology.
Shiller’s arguments suggest a deep-seated nihilism about the ability of economics to predict the performance of the market and, indeed, challenge the efficient market hypothesis and its underlying assumption that market participants are rational actors.
Nevertheless, Shiller confidently predicted that real estate prices are today experiencing a bubble and that these prices will inevitably fall toward the construction cost level in the long run. However, Shiller could not say when this bubble would burst, only that housing markets in some areas such as California’s Bay Area or Boston have inflated housing prices well above construction costs.
Following the lecture and a brief question and answer session, Shiller and others, including Professor Ed Tower, who had introduced him to the Von Canon crowd, discussed in more detail some of the issues that his speech raised.
| —Ken Reinker, ’03 |
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