The economy is in trouble, and there’s little the Federal Reserve can do about it, says esteemed Yale economist Robert Shiller.
Economic growth slowed in both the first and second quarters, he notes in an interview with Yahoo’s Tech Ticker. “That’s not a very strong indicator, but it does suggest a recession may be coming soon,” Shiller explains. “Things are looking weaker now.”
As for the Fed, it already has pushed short-term interest rates to zero. “So they can’t do anything more about it,” Shiller says.
“They’re pushing on a string. It’s just not enough. If people don’t want to spend, if they aren’t confident about the future, even if you offer them a zero borrowing rate, they don’t want it.”
That situation amounts to a “liquidity trap,” a phrase legendary economist John Maynard Keynes coined to describe the Great Depression.
As for the housing market, the S&P/Case-Shiller index of home prices fell 0.3 percent in August from July. That’s the second consecutive decrease and the biggest drop since April 2009.
Home prices have suffered from the June 30 expiration of the homebuyer tax credit. “It’s a worry that the support we saw isn’t continuing, and that we’ll resume the downturn we’d been seeing over the previous three years,” Shiller says.
Some big-time investors like hedge-fund star John Paulson are making bets on housing and raw land. That’s a risky strategy, Shiller notes. Prices in those markets may rise.
“But it’s also possible we’ll see a resumption of the downtrend,” he says.
“I don’t believe in efficient markets, but I do to the extent that I know it’s hard to predict these markets. Paulson can’t predict them either because there are too many things that can affect markets.”
Tuesday’s elections are one such example.
The home-foreclosure scandal has put a damper on the housing market, Shiller says. “The question is whether there will be more revelations of errors companies made under the pressure of this crisis,” he says.
“It’s going to be an ongoing saga.” The problems will only worsen if home prices fall, which they have just barely begun to do, Shiller says. “If prices go down another 5 percent, that will put a lot of stress on financial institutions.”
Karl Case, Shiller’s partner in creating the home-price index, also is worried.
“The recovery that started in 2009 has petered out,” he tells Bloomberg. Excess supply is the main issue for housing, he says. “That’s the big negative: the vacancy inventory.”
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