They called him “Mr. Bubble.”What's striking, in retrospect, is just how radical a position this was at the time. By the summer of 2005, even Shiller's famous stock market prediction was no longer looking quite so smart. The Standard & Poor 500 had rallied sharply from its lows in the wake of the dot-com crash. Shiller had predicted in 2001, as the crash was happening, that the market might fail to keep pace with inflation over the coming decade. Instead, it began rising in 2002 (on its way to a new, much-hyped record high in 2007). Yet here, in 2005, was Shiller -- who has been called both Mr. Bubble and Dr. Doom -- publicly forecasting another cataclysm. Wall Street cheerleaders were only too happy to point out his spotty record as an investment adviser for the masses. By 2005, stock prices were twice as high as they had been when Greenspan gave his “irrational exuberance” speech. And the real estate- industrial complex -- real estate agents, mortgage brokers, home builders, and the like -- was similarly dismissive. During an interview I did in 2005 with Robert I. Toll, the chief executive of Toll Brothers, a large, high-end home builder, he brought up Shiller's name without my having asked. “Shiller is predicting the mountain goes into the sea,” Toll said. “He's selling himself.” Even many of us who found Shiller's dispassionate, history-based analysis to be persuasive had trouble going quite so far as he did. I had had my own little revelatory experience with The Chart when first reading Irrational Exuberance in 2001. (I remember where I was: sitting on a sofa in my Manhattan apartment one sleepless night.) Later, Shiller's research on real estate helped persuade me the country was in the midst of a real estate bubble that was destined to burst. I wrote articles in the New York Times suggesting as much and advising people to consider renting a home, instead of owning it, until prices came down. At a high school reunion in 2005, a classmate who was a real estate agent asked me to please stop. Still, these articles typically included a caveat that softened the message: even if house prices in some areas began to fall at some point, most economists thought that the declines were not likely to cause a recession. After all, as Greenspan liked to remind people who worried about the existence of a housing bubble, house prices nationwide had not fallen since the Great Depression. Shiller himself also couched his message carefully. He always specified that a long-term stagnation, in which prices fail to keep pace with inflation, might be the most likely outcome. But the implications were still serious. Housing had become an enormous part of the American economy. If it were in the midst of a bubble -- “the biggest boom we've ever had,” as he said in 2005 -- it was going to create big problems. Roubini, the NYU economist, was one of those people who grasped this. He had long been a pessimist, but Shiller's housing chart persuaded him to ratchet up his pessimism to a new level, he has told David Ignatius, a Washington Post columnist. Like Shiller, Roubini ended up sounding like an extremist. When he delivered his forecast at an International Monetary Fund meeting in 2006, “he sounded like a madman,” as one economist told the New York Times Magazine. We know how the story ends. House prices have indeed fallen across the nation. In some cities, like Miami and Las Vegas, they have fallen a stunning 50 percent. The stock of Toll Brothers has fallen more than 60 percent from its high. The housing bust has helped to cause not merely a recession, but the worst recession in at least a generation and the worst financial crisis since the Great Depression. And that stock market rally that followed the dot-com crash? It too has ended with a crash. In mid-August, the S&P 500 was trading at slightly more than half of its 2000 peak, adjusted for inflation. Thirteen years after Shiller had lunch with Greenspan -- a period in which the economy and corporate earnings have both grown substantially faster than inflation -- stock prices, in real terms, are right back where they were. Shiller and I sat down again recently, in Washington, where he had come to give a talk, and I began our discussion by suggesting that he could finally stop worrying about bubbles. The bubbles he had spent so much of the last 15 years thinking about had largely disappeared, it seemed. He replied that gold seemed to be in the midst of a bubble. “But that's inconsequential,” he added. This means that -- at the age of 63 -- Shiller is in many ways beginning a new stage of his career. He is no longer Mr. Bubble. His predictions have won him renown. Indeed, he has become one of a handful of Yale professors today with some claim on national fame. For the paperback edition of one of his recent books, the publisher put a picture of Shiller -- hand on chin, in front of one of those big Corinthian columns in Beinecke Plaza -- on the cover. But now that he has an audience, what is he going to say to it? “What is the thing that should be on our mind now?” as Shiller put the question. “It's how to preserve this sense of justice and good feeling that we have in this country -- this feeling that I am willing to operate and do business in good faith because I feel that's what people are doing and that's what a good citizen should be doing.” Survey data from around the world have shown that economies grow more quickly when people trust their fellow citizens. But the financial crisis and the recession have left many Americans with a sense of distrust, Shiller said. A prolonged period of high unemployment -- which now appears to be the most likely scenario -- could aggravate the situation. The United States, in other words, may be heading into a period of irrational pessimism. Figuring out how to avoid this outcome is Shiller's new project.
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