Set forth below is the text of a comment that I recently put to another blog entry at this site:
It looks Shiller is once again in odds with you. Last week we saw his statements saying you can’t time the market, particularly using CAPE. Shiller, in fact is still heavy into the market. Now, take a look at what he says was the cause of the recent and ongoing financial crisis:
He puts it primarily on the boom and bust of the real estate market.
Uh, oh Rob. In your fantasy world, is he now a part of the vast conspiracy?
Thanks for bringing this article to our attention, Pink. I agree in part with the point you make. But only in part. But the article is one that people following these issues need to be aware of in any event.
The conspiracy you refer to is a conspiracy of ignorance. Shiller’s “revolutionary” (his word) 1981 finding that valuations affect long-term returns changed our understanding of how stock investing works in a fundamental way. If valuations affect long-term returns, the market is not efficient (properly priced) and both overvaluation and undervaluation are real things. The market was overvalued by $12 trillion in 2000. If overvaluation is real, as Shiller showed, that $12 trillion of consumer spending power was going to disappear from the economy over the course of the next 10 years. Hence, the economic crisis that we experienced in September 2008.
There’s nothing difficult to understand in that paragraph. It is as easy to understand the primary cause of the economic crisis as it is to understand that the errors in the Old School safe-withdrawal-rate studies should have been corrected within 24 hours of the time that they became public knowledge (the morning of May 13, 2002). The studies have not been corrected as of today and as of today there are still lots of smart and good people who are not properly assigning blame for the economic crisis to the reckless and relentless and ruthless promotion of Buy-and-Hold strategies in the years leading up to it.
You have on many occasions argued that for this to be so there would have to be some sort of grand “conspiracy.” My response every time you have raised this point has been to say that the conspiracy that is doing us so much harm is a Conspiracy of Ignorance. Prior to 1981, we did not know how stock investing worked — Shiller provided us with a very big piece of the puzzle. SInce 1981, we have failed to incorporate the many far-reaching implications that follow from Shiller’s breakthrough research into our model for understanding how stock investing works.
Humans learn about things by talking them over. We have as a society not yet given ourselves permission to talk these things over in clear and firm and blunt language. We very, very, very much need to do that. We need to have a National Debate on the implications that follow from Shiler’s research and on the 33 years of peer-reviewed academic research confirming and expanding his findings. I certainly do not say otherwise. I very, very, very much want to see that National Debate begin by the close of business today.
You are correct to say that Shiller put the blame for the crisis on the boom and bust of the real estate market. That’s silly. First of all, the phony stock market gains fueled the boom in real estate prices. When $12 trillion of Funny Money is put in the hands of stock investors, they obviously spend a lot of that windfall on real estate. Second, the bubble in stocks was far larger than the bubble in real estate. The real estate bubble certainly was a contributing factor. But the real estate bubble was secondary. The stock market bubble (which was caused by the popularity of The Buy-and-Hold Idea, the idea that investors don’t need to exercise price discipline when buying stocks and that phony, bull market gains can be counted as real and permanent wealth) was primary.
Shiller should be saying that. If you point is that Shiller should be saying that, I certainly agree.
Is he part of a conspiracy?
He is one of a large number of generally responsible people who is acting in an irresponsible way (perhaps unintentionally, but still…) when he makes comments about the cause of the economic crisis.
I am not able to say whether Shiller knows that the stock bubble was the true cause of the economic crisis and he is saying otherwise with knowledge that what he is saying is wrong or whether he truly has not yet put two and two together and realized that it was the stock bubble that was the primary cause of the crisis and that the real estate bubble was only a secondary cause.
My guess is that it is a combination of both. Shiller is aware of the abuse that has been dished out to those of us who have posted honestly on what we have learned about stock investing as a result of the last 33 years of peer-reviewed research in this field. My strong hunch is that Shiller has seen a huge amount of abuse directed at his over the years (he has publicly confirmed that there has been at least limited abuse but my guess is that he could write a book describing the many forms of abuse that have been directed at him). So he possesses a natural desire to hold back on his criticism of the Buy-and-Hold Model.
When he holds back, he loses an opportunity to develop his understanding of the realities. So it is likely that he is suffering from a good bit of cognitive dissonance as well. He probably knows that the stock bubble played a larger role than he suggests with his comments but he also probably does not truly understand how deep the problem goes because he doesn’t want to know and his mind plays tricks on him to keep him from learning more.
One information bit that I can supply is that Shiller PREDICTED the 2008 economic crisis in his book, which was published in March 2000. In his prediction of the crisis, he properly attributed it to the out-of-control bull market. It is only after the crisis began and Shiller saw that others were holding back from stating the true cause of the crisis that he began engaging in the caginess that you caught him engaging in here.
That’s sad, is it not?
That hurts all of us, does it not?
I want Shiller to know as much about stock investing and the economic crisis and the dangers of stock bubbles and Buy-and-Hold investing strategies that he can possibly know. I want the same for my other good friend Jack Bogle. And I want the same for Bill Bernstein and Larry Swedroe and Wade Pfau and Scott Burns and Pink Unicorn and on and on and on.
Do you want the same, Pink?
If you do, you will do everything in your power to encourage everyone you know to do what they can to see that the National Debate begins prior to the close of business today. That is certainly what I am going to be doing.
There are a lot of people who don’t want to acknowledge that Buy-and-Hold caused the crisis. For some, it’s a money thing. For some, it’s a pride thing. Some are worried about lawsuits for investing advice they have given that was in conflict with the findings of the post-1981 research. Some are worried about prison sentences because they have engaged in acts of financial fraud as part of an effort to hold back public discussion of the implications of Shiller’s findings. And cognitive dissonance is a big part of the story in just about every case as well. So there are lots of bad stuff in the process of ruining all of our financial futures.
Shiller is a smart fellow. I rank him as the most influential investing analyst of all time, even ahead of my good friend Jack Bogle. I love the guy. But, yes, you are right to suggest here that Shiller is in the wrong to improperly identify the primary cause of the economic crisis. If he truly doesn’t know better, he certainly could know better and should know better, right? He is the author of the friggin’ research showing that valuations affect long-term returns! I mean, come on.
I want to see Shiller do better. I want to see Bogle do better. I want to see you do better. I want to see me do better. I want to see us all do better.
The cover-up helps absolutely no one. Because it cannot continue. If you are engaged in a cover-up that you know is going to come to an end in the not-too-distant future, the thing you should want is to bring it to a QUICK end. I don’t mean just to help the millions of middle-class people whose lives are being destroyed by the cover-up. Someone involved in a cover-up that is going to end soon should want that cover-up to come to a quick end for entirely selfish reasons too. There is going to be a price to be paid when the cover-up is exposed, right? The price grows bigger the longer the cover-up remains in place, right? So it follows that even those involved in the cover-up should want it brought to a quick and complete end.
Stocks were overpriced by $12 trillion. Overpricing always disappears. An economy that loses $12 trillion in consumer spending power obviously collapses.
It’s not hard intellectually.
We are all (including our good friend Robert Shiller) living in fear today. We have seen how ruthless the Buy-and-Hold Mafia is when someone dares to tell the truth re these matters. And all us humans are social creatures. We want to be liked. We don’t want to tell people that they were played for fools. We don’t want to tell people that their retirement plans were rooted in fantasies. We don’t want to tell people that they are on the hook for hundreds of millions in civil damages and in some cases looking ahead to long prison terms. I get all that.
What I don’t get is how people persuade themselves that there is some kindness in evidence in actions making things worse and worse and worse for every single person involved in this mess.
We are the luckiest generation of investors that ever walked Planet Earth. I vote for taking things to where we need to take them so that we all can tap into the benefits of the wonderful intellectual advances of the past 33 years.
Shiller is wrong to say what he said about the cause of the economic crisis. He is as much a part of a “conspiracy” as everyone else who has failed to speak out. That group included Rob Bennett until I worked up the courage to “cross” John Greaney by posting honestly on the errors in the Old School safe-withdrawal-rate studies on the morning of May 13, 2002.
Perhaps we should look at it from the other direction. What if Shiller DID speak out? That would bring all the ugly stuff to an end, would it not? That would make all our lives a lot richer in every sense of the word, would it not?
Someone is going to do it sooner or later. Perhaps it will be Shiller, perhaps it will be someone else. Given that someone is going to do it sooner or later, every last one of us (including those of us who will be going to prison) are better off if it happens sooner, are we not? It sure seems so to me.
Shiller isn’t just at odds with Rob Bennett. When Shiller fails to attribute the economic crisis to the insane bull market and to the long-discredited Buy-and-Hold strategy that caused it, Shiller is at odds with Shiller and with Shiller’s research and with the 140 years of historical return data on which Shiller’s research is based. That’s the real news here.
I hope that helps a bit.
You have my best and warmest wishes for a happy and prosperous New Year.