If anyone can be said to speak for the accumulated learning of
technical economics on the subject of today's stock market, it is
probably Robert J. Shiller. He is centrally located in the
profession: trained at Massachusetts Institute of Technology,
professor at Yale University, a deacon of the famous Cowles
Foundation for research in economics. He is distinguished: In 1996
his Market Volatility and Macro Markets won the first Paul Samuelson
Award for the year's best writing on finance. He is practical, a
partner in the prosperous firm of Case Shiller Weiss, which sells
market data to real estate industry. He's still young enough (53)
that when he makes a prediction his reputation is at stake.
Most significantly, he is self-aware. Shiller operates in the
shadow of what surely is the most famous prediction by an economist
in the 20th century. It was in October 1929 that Yale's Irving
Fisher -- the best-known economist of his day -- pronounced his
opinion that stocks had reached a new and permanently high plateau.
That he lost a considerable personal fortune in the ensuing crash
only buttressed Fisher's place in history as a symbol of the
shortcomings of economists. Yale had to buy his house to save him
from eviction. The very real contributions Fisher had made to
deepening economic understanding were overlooked for the rest of his
Thus it is an event of some significance that Shiller has written
a crystal-clear and tough-minded critique of the factors that have
driven U.S. stock markets to their current levels and called his
book Irrational Exuberance. In it, he argues that Federal Reserve
Chairman Alan Greenspan had it exactly right when he uttered the
famous phrase in a speech in 1996.
The current high levels of the market don't represent a consensus
judgment by a cadre of sober experts, says Shiller. Instead, today's
market is sky-high because of wishful thinking by millions of
people, egged on by professionals in and around Wall Street whose
incentives all run in the direction of the more the merrier.
The speculative frenzy is comparable to periods during which the
stock prices peaked (measured in terms of price-earnings ratios) in
1901, 1929 and 1966, says Shiller. It simply is not likely to last.
And though he is careful not to say when he expects the fever to
break, he is clear that he expects it to happen within the next few
"There is a lack of sobriety about its downside and the
consequences that would ensue" if the Dow Jones Insustrial Average
dropped to, say, 6,000 and stayed there for some years, he writes.
The harmful effects would be enormous -- to individuals, pension
funds, college endowments and charitable organizations.
The Dow Jones Industrial Averaged tripled between 1994 and 1999.
Nothing else in the economy tripled during those years. So Shiller
surveys an even dozen factors he says have contributed to the self-
fulfilling psychology of the bull market in stocks. Taken together,
he says, they comprise the "skin" of the bubble.
* The arrival of Internet technology at a time when corporate
earnings already were high has given rise to an exaggerated sense of
* The decline of foreign rivals and the resultant surge of
American triumphalism has given rise to a pattern in which all news
is viewed as good news.
* Cultural changes favoring business, trends in the compensation
of executives in particular, has fastened ever-greater attention to
* A Republican Congress, having made capital gains tax cuts in
1997, has intimated the possibility of further cuts, leading
investors to hold on to appreciated assents they otherwise might
* The sheer size of the generation of the baby boom is widely
believed to have a salutary effect on the market. …