Yale’s Shiller: World in a 'Late Great Depression'

Monday, 30 Apr 2012 07:50 AM

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The global economy is mired in a "late Great Depression" despite central bank stimulus policies, says Yale economist and author Robert Shiller.

"Our whole economy has been affected by variations in confidence. Central banks are sort of trusted, but the actions they have often affect people’s confidence by appearance rather than substance. We’re not in the most trusting mood now,” Shiller tells CNBC.

The Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have propped up their respective economies via liquidity injections known as quantitative easing, tools designed to spur recovery but dubbed by critics as printing money out of thin air.

He says the world is in a “new age of austerity.”

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

Critics say such monetary tools don't improve fundamental economic problems of too much debt and too little growth, although Shiller points out that the jury is still out whether fiscal measures taken to tackle those problems such as budget cuts and tax hikes in Europe especially are having a desired effect.

"Quantitative easing is not as prominent a policy as austerity ... the effect of austerity is not crystal clear because it depends how people react to it," says Shiller, who accurately called the tech bust of the early 2000s and the housing bust later that decade.

"It might help, but I don’t know if it's going to overwhelm the general mood of austerity, which is affecting the housing market."

Shiller, designer of the Standard & Poor’s/Case-Shiller house price index, adds it's "really hard to forecast" if the U.S. housing market is finally recovering but does find one bright spot.

"The general presumption is that home prices are going down and that's good – it'll make them more affordable."

Cheaper housing prices will encourage many to avoid relying on their homes as the bulk of their investment portfolio and diversify, which is a good thing, Shiller adds.

"Fifty years ago, there wasn’t this talk of housing as an investment. It was a zeitgeist of the early 2000s, and it has gradually gone."

The housing sector appears to be bouncing along a bottom.

Building permits issued in March rose 4.5 percent, beating out calls for a decline of around 0.7 percent, although U.S. housing starts fell 5.8 percent compared to forecasts for a 1.0 percent gain, according to government data.

Experts agree the housing sector remains battered and recovery a long way away thanks to a glut of unsold homes.

"It's going to be rocky for a while," says Gregory Miller, an economist at Suntrust Bank in Atlanta, according to Reuters.

Housing prices will drop by a further 20 percent as the downturn gripping the United States deepens, leading economist Gary Shilling says.

Writing in the Christian Science Monitor, Shilling said more and more people are looking to rent as homeownership becomes increasingly rare.

“Housing activity remains depressed, with the only life coming from the multifamily component, which is being driven by the zeal for rental apartments as homeownership falls,” he wrote.

“Homeowners are losing their abodes to foreclosures; many can’t meet stringent mortgage lending standards; some worry about homeownership responsibilities in the face of job uncertainty; and many people have no desire to buy an asset that continues to fall in price.

“I am looking for a further 20 percent slide in housing prices.”

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans



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