Has Robert Shiller Lost His Mind?

Has Robert Shiller, famed Yale University economist and home-price maven, lost his mind?

Judging by some of the comments he made in recent interviews on Yahoo's Tech Ticker, one might suspect he's no longer fully in touch with reality:

First, he said that home prices might experience another bubble:

Robert Shiller on Yahoo's Tech Ticker Monday

"After the inventory is worked off and after the foreclosure period is over, there could be a rebound, and it could be turned into a bubble."

This is absurd because the very concept of a financial bubble requires at least three things:

• Bubbles usually occur after years of "healthy" appreciation driven by "fundamentals" rather than "speculation."
• The gains convince people the price trend is irreversible, forcing skeptics (often shorts) to become believers. This provides a stream of buyers into the bubble asset.
• Rising prices feed on themselves to generate more speculative demand. This happened in the 1970s with Latin American debt, in the late 1990s with U.S. equities and recently with home prices.

Obviously none of these conditions will affect real estate again for decades to come. That statement, however, was a picture of sound thinking compared with some other comments that came out of Shiller's mouth on Tech Ticker:

"I think that we should get going with more stimulus."

When asked whether that all the deficit spending would hurt the country's ability to borrow, Shiller's response was even more shocking:

"Having too much public expressed concern about a possible collapse of the U.S. government market I think is counterproductive right now."

Source: Congressional Budget Office

Shiller even acknowledged there is "some legitimacy" to concerns about our long-term debt levels, but:

"I haven't been stressing them -- probably because I think that it's really important that the stimulus package go ahead, and that the government continues to borrow."

Excuse me? Here's the same guy who warned us for years that home prices were in an unsustainable bubble because people were borrowing too much money. And now, when it's something 100 times more important -- the sovereign creditworthiness of our nation -- he wants to turn a blind eye? That's exactly the kind of reasoning that allowed countless Americans to wind up with no-income subprime loans that defaulted months after being funded. He even chose to make these statements on the same day the Treasury Department reported its first trillion dollar deficit ever.

But don’t worry, says Shiller, because all the government spending will be "an opportunity to move forward to a better kind of capitalism that works even better."

A better kind of capitalism? Who will bring us this better functioning capitalism? The same people whose "Cap & Trade" bill threatens to double electricity prices by 2012? The same politicians who want to expand unionization at a time when most people are lucky to have a job? The same elected officials who refused to see the looming train wrecks at Fannie Mae and Freddie Mac, and to this day have done nothing to deal with the real enablers of fraud on Wall Street, the rating agencies and regulatory bodies?

Shiller's adamancy about the government's urgent need to borrow is even more bizarre when compared with recent comments by Paul McCulley of Pimco on Bloomberg Radio:

"I have difficulty coming down table-pounding that we need another stimulus package."

While is sounds mild, this is a huge statement from McCulley. Not only is he a brilliant investor and a giant in the Treasury market, he is also a flag-waving Keynesian and big supporter of the Democratic Party. (The Huffington Post says he gave $2,300 to Barack Obama in 2008 and $2,000 to John Kerry in 2004) Back in January on CNBC in January, McCulley praised government spending, saying it would "soften the blow of the delevering in the private sector."

Fast forward back to July, and McCulley is warning politicians against another stimulus package without "linking it explicitly to a long-term discussion about the entitlement programs."

We all know that's not going to happen, so McCulley is basically saying "no more stimulus." His colleague Richard Clarida, another titan in the world of fixed-income said on Bloomberg Radio:

"The impact from the stimulus is going to be very disappointing, and I certainly wouldn't urge Washington to do another one."

When Pimco speaks, we all should listen. Shiller's incomprehensible statements about the danger of another housing bubble, his blithe confidence in government to solve our problems and his premeditated negligence about the dangers of runaway spending not only raise serious doubts about his competence as an analyst. They should cause all of us to question his very grasp on reality.