help prevent future crises?
Shiller: There’s always been
concern that creating a speculative market will reinforce
speculative behavior and create
bubbles. There’s scholarly literature on this, but no one has
been able to prove by controlled
experiment that destabilization
It seems to me that setting
up speculative markets stabilize
things. They embody the market’s
view of future asset prices, so they
aid in price discovery. Investors
who doubt current asset prices
can, with derivatives, nudge them
down, and those who support
them can nudge them up.
Moreover, creating liquid, ef-
ficient markets helps people get
out of risks. Sometimes you see a
bubble happening and you don’t
know how to get out or protect
yourself against an eventual
crash. How do you get out or
protect yourself when it’s your
own home? Having liquid con-
tracts will allow people to express
their opinions better, and I think
it will tend to stabilize things.
REIT: In addition to home equity
insurance, you’ve also advocated
continuous workout mortgages
and regulatory hybrid securities.
The former adjusts the balance
as the home’s value changes, with
debtholders mitigating their risks
in the futures market. The latter
is debt that converts into equity,
boosting bank capital ratios in
bad times. Are any of these innovations transferable to com-
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Shiller: I don’t see why not.
Why shouldn’t someone who
is buying casualty insurance on
a commercial property also not
get insurance against the bigger
market risk of declines in the
value of that property?
Also, I intended continuous
workout mortgages for hom-eowners, but commercial mortgages could benefit from the same
risk-reduction technique. A developed, modern economy should
allow companies to pursue their
business without the distraction
of other risks. Leave the speculating to the speculators.
REIT: You’ve been working in
behavioral finance since at least
1991. What do you think of the
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