This is an excellent talk by Robert Shiller on his book Irrational Exuberance. It is geared more to institutions and advisors, but here's a summary if you don't have time to watch.
Summary of the talk:
- Long way to go, this could last for many, many years, 5 to 10 years before we see things in housing return to normal (meaning 1997 era).
- Housing boom in 1997 was the biggest in history, and has collapsed 54% since then, so prices grew 100% from 1997 to 2006.
- Bubble Theory should be a full class series in Economics, excitement compounds, and as depression.
- Psychology management is key, when prices go up everyone gets excited, banks want to lend more when they should be cautious, and when prices go down they tend to be cautious when they should be more aggressive – (picture our emotional roller-coaster chart).
- We trusted financial institutions too much, didn’t consider that they could fail.
- Bailouts don’t have a lot of theory, so we are just patching holes – many of which offend our normal beliefs that we should not reward bad behavior.
- Real estate cycles are much less rational than other markets, they tend to go up and down with a lot less clear cause.
- We might want something closer to a ‘New Deal’ that changes the way institutions work. Three key things need to happen:
- New information infrastructure (clients need better advice – general public does not have a financial advisors they have sales people)
- New broader markets (broaden the scope of how risk is managed, you need to manage asset and liability risk together)
- New retail products (mortgage – traditional dominates and innovation is very difficult – we use long term fixed rate, and in other countries they use long term adjustable – mortgage products should be designed specifically to manage the risk of the individual consumer - current system favors the irresponsible - and future products should build in adjustments that alter product dynamically, rates and balances should adjust dynamically by market conditions to protect people from themselves).
