Economist Shiller says bailout is just the beginning

Yale University economist and bubble predictor Robert Shiller isn't any clearer than the rest of us on whether Congress's proposed $700 billion financial-markets bailout will save the economy.

But he's positive of one thing: Congress needs to move quickly.

"Given the intensity of the crisis, I'm willing to write my part of the check," Shiller said, speaking Thursday at a Greater Seattle Chamber of Commerce breakfast.

Even with a bailout, "My worry is we'll be in a slow economy perhaps for years to come, but at least we won't have a collapse," he added.

A developer of the widely quoted S&P/Case-Shiller Home Price Indices and one of the early predictors of a home-price bubble, Shiller is in Seattle promoting his newest book, "The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do About It."

Shiller said he wrote the book early this year anticipating that toxic subprime loans would continue to drag the economy down.

But with the recent nationalization of Fannie Mae and Freddie Mac, with the sale of Merrill Lynch to Bank of America, with Lehman's bankruptcy, the situation now "is even worse than I anticipated," he said.

Since the details of Congress's rescue are still being formulated, Shiller said it's impossible to know how well it will work.

Meanwhile, he acknowledges very real public anger.

Some 10,000 homes are being foreclosed upon daily, he said, and what are their owners "to think when we're bailing out rich companies? There has to be a sense of fairness."

Also, what's to stop the nation's ailing financial firms from dumping their sickest debts onto the government while keeping the healthiest? That would amount to a "free lunch" for them at taxpayers' expense, he said.

While this situation is playing out quickly, Shiller suggested long-term changes to help prevent future bubbles, starting with better financial literacy.

Going back a century or more, the U.S. has suffered numerous economic bubbles, yet the public generally denied their existence until they popped, he said.

"The great mystery of human nature is how you get bubbles repeatedly."

As an antidote, the government should subsidize independent financial advice for everyone — with the advisers paid by fees, and not sales commissions, he stressed.

New financial watchdogs should be created to take consumer complaints, and financial disclosure improved so the public can see how intertwined markets really are.

Finally, Shiller suggested developing real-estate risk markets to trade in housing futures.

The idea already is in limited practice, but Seattle is not among the cities included. Such a market would have minute-by-minute pricing so buyers could adjust their risk, Shiller said.

Elizabeth Rhodes: erhodes@seattletimes.com