Robert Shiller: “Sweden has a bubble”

The following is my translation of an article carried in today’s Dagens Nyheter, Sweden’s largest daily newspaper. It talks about a Swedish housing bubble and about policy choices in the United States.

Sweden may have a bubble in its housing market. But now that housing prices have begun to fall, it is too late to deploy countermeasures. So says U.S. economist Robert Shiller who early on predicted the recent financial crisis as well as the dotcom crash after the millennium.

Housing prices have risen in Sweden at least as much as in the countries where prices have crashed. Therefore, one can not exclude the possibility of a price bubble, says Robert Shiller.

He is often mentioned as a future Nobel laureate as result of his economic research. Robert Shiller has been outside the mainstream that believes in perfectly efficient markets. According to him, instead markets are driven by "animal instincts" where psychological and even biological factors play an important role.

These are the things hard-wired into human beings and that one cannot control. We often participate in herd behaviour, without understanding it. These are the drivers of financial bubbles when everyone believes house prices or stock prices can only rise, he explains at Skagen Funds new year’s conference.

Robert Shiller warned early on of the housing bubble in the US which precipitated the financial crisis. Now he seems similarities to the depression of the 1930s, even though the policy response has been more effective this time. A sign of lingering problems is that interest rates are near zero.

In the United States, there is hardly room left for the central bank to do anything. US households are cautious and holding back on consumption. Amongst households, there is no real confidence regarding the future of the economy, after what has happened in recent years.

Instead, government must kick-start the US economy, Robert Shiller believes. However, due to concerns about further growth in the budget deficit and the national debt, other routes must be found. According to him, one should raise taxes and increase public spending on infrastructure, education and research.

Economically there are no obstacles to this. Rather the question is a political one. The United States has an opportunity to build for long-term growth, where we can re-attain full employment.

Financial markets will be of great benefit if you can make them work better, he points out. The anger against them in many places is understandable, but not very constructive:

It does not help to Occupy Wall Street. Instead reforms are needed that will make the finance sector better meet people’s needs. I call it financial democracy, emphasizes Robert Shiller.

Johan Schück

Edward here. In Finland, Denmark, and the Netherlands, concerns of overheated property markets are rife as well. These economies are doing well. However, the flip side is that asset markets must be a concern.

Source: ”Sverige har en bubbla” – Dagens Nyheter

Also see:

• Bubble Trouble In Finland? – Oct 2010
• Sweden’s Boom Economy – Aug 2010
• The latest bubble warning: Swedish house prices – Oct 2009