US needs further stimulus: Robert Shiller

Excerpts from Your World at 10 on CNBC-TV18 Watch the full show » Nifty BSE | NSE 22/02/12 Are Mutual Funds betting on Nifty?

In a statement on Tuesday, the World Bank said that it had cut its 2009 growth forecast for most economies and that the global economic picture remains very gloomy. This comes despite signs of a revival in the US housing market and consumer confidence. So are the green shoots that economists are talking about for real? Robert Shiller, Professor of Economics at Yale University, said confidence in the global and the American economy was indeed turning around but more stimulus was still needed. "I think that the stimulus package should be generally increased because we are still in a very weak situation and this confidence burst that we have seen is not clearly sustainable because we have seen this kind of thing happened many times before and there is a burst of enthusiasm which is kind of supported by a market boom but then it doesn't last and it seems to me that the governments haven't done enough generally around the world because the contraction is big and more is coming, real estate prices are still falling," he said.

Here is a verbatim transcript of Robert Shiller's exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: What is your prognosis of where we stand in the global economy and America leading that picture?

A: It has looked bad until around March and it seems like confidence is up globally because every major stock market in the world bottomed out in March. That is true of India too; US, India, lots of countries but I don't know if it is going to hold. That is confidence but it is not economic activity yet.

Q: Reconcile these many comments that are coming in from across the world for instance when the World Bank cut its forecast for the year 2009, the World Bank Chief Economist is quoted saying that government should stick to spending more to reignite growth because economies are still looking weak across the world. Meanwhile the head of the European Central Bank's (ECB) Jean-Claude-Trichet says there is a moment when you cannot spend any more and you cannot accumulate any more debt and I think we are at that moment. So how do you reconcile the fact that you are not seeing a resurgent in economic activity but you are seeing one in confidence. There is the Chief Economist of the World Bank saying government should spend more, there is the head of the ECB saying there is no more room for any more debt for any government to take on, what do we do from here onwards?

A: This is a difficult judgement call in difficult situation with overall recession being as strong as it is. what should we do? In my judgement I think that the stimulus package should be generally increased because we are still in a very weak situation and this confidence burst that we have seen is not clearly sustainable because we have seen this kind of thing happened many times before and there is a burst of enthusiasm which is kind of supported by a market boom but then it doesn't last and it seems to me that the governments haven't done enough generally around the world because the contraction is big and more is coming, real estate prices are still falling, I think the stock market may be correcting down. This confidence may not last and we may still be in trouble.

Q: Do you see governments especially let for instance United States, the deficit now is touching historic proportions; is there room for governments to borrow more to print more and what if the problem - I know it maybe a problem that is still a little distant in the future but the problem of inflation.

A: In the US, the national debt as a fraction of gross domestic product (GDP) is well under 1. If you look at Japan, it is the obvious comparison because Japan had 15 years of bad economy after their bubbles in the stock market and the housing market burst. Japan moved its government debt as a fraction of GDP close to 2 times GDP. So we have got a long way to go before up in the Japanese level.

On the other hand, government bond yields have been going up in the US recently and that may reflect market fears of inflation in the future or just market souring on the idea of investing in US government debt.

Q: How big a fear is inflation according to you because you are recommending on the one hand that government should continue to spend even in the US?

A: I cannot think that inflation scares at this point of history are not going to be dominant factors because we are in deflation. In the US, the consumer price index is down several percent over a year ago. You can say that is largely because of the drop in oil prices over a year ago. But I think it does show that we are far away from an inflationary environment now. I think if we are thinking about inflation, we are talking about long-term bonds, whether it might break out in sometime in five or ten years. For immediate purpose of government stimulus, countries have to be on the side of emphasizing stimulus and not worrying too much about this debt problem. I know that interest rates are up a little bit but I would not worry. I think we have to push forward and stimulate the economy.

Q: Media reports say that as the Fed meets today (June 23, 2009) and tomorrow (June 24, 2009) it will be discussing exit strategies, strategies to unwind stimulus efforts and I am guessing that you don't agree that this is any time to be even thinking about it - leave alone action.

A: I think we do have to think about exit strategies. In the US, the Federal Reserve Bank has doubled its balance sheet in a year's time and they have massively increased bank reserves and the money supply has gone up - not as much but it has gone up quite a bit. All these things are potentially inflationary. So it is very feeling that they talk about exit strategy. But it is down the roadways, we have to have a plan in place and I think there are lots of other things that have to be talked about.

The real fact is that we are in a global recession that we haven't seen since 1930s. We are in a serious economic - that is what aborted the recovery in a great depression is that people were afraid of the government deficit and believe it or not people were afraid of inflation during the Great Depression. So the government didn't stimulate as much as it should have been and they stayed in the depression for 10 years. We don't want to make that mistake again.

Q: When you talk of more stimuli or more stimulus packages, what is it that you would like to see in the USA, more of what they already did in that USD 800 billion stimulus bill or is it a different kind of effort that you think will be needed to yield better results?

A: I know it is very complicated to actually do a stimulus bill. I remember Larry Summers who is head of the National Economic Council in the US - he said, "It is harder to spend USD 300 billion than you would think. Sounds easy to me but when you are trying to think of government expenditure programmes, there are media that you can launch immediately and you can shut down when you feel that the time is no longer right for stimulus. It is hard until I simplify some of these people, you could end up misspending the money. I am entirely confident that I would do a good job of deciding on these things either. I think what I am looking at though is that we are in trouble. The economy may not be recovering and we certainly have to try to expand the stimulus package.

Q: Just like many chief executive officers (CEOs) we speak to across the world say that these green shoots aren't for real as yet, you believe as well that these green shoots aren't for real. How long if there is a way to estimate do you think it will take for both the American economy and therefore the global economy which is intrinsically linked to the American economy to be able to recover and for those green shoots to actually be there for real?

A: I think these green shoots suggest spring is coming, the season is changing. That is not what we are seeing, what we are seeing is something potentially much more ephemeral, we are seeing confidence grow. That is what we need. In my new book with George Akerlof called 'The Animal Spirits', we argue that confidence is what drives the world's economies. It has not recognized enough by economists. So it is certainly good news that confidence seems to be growing but on the other hand confidence is not like spring, it is not something that is just going to go with the predictability of the seasons. It is something that can come and go, it is ephemeral; it is something that the governments of the world have to follow up this surge of confidence with real actions that will reinforce the impression that the economy is coming back.

Q: What dent in confidence do you expect from the kind of price hikes we are seeing in crude last week it had gone up all the way USD 72 per barrel, it has come off in trade a little bit this week but it seems that crude is back on the incline?

A: Right and that is - oil prices have then a major factor in global recessions in the past. So that is a concern and then there was the interest rate increase concerns. Who knows what else will come later. I am thinking of following real estate prices at least in the US as a factor that will continue to worsen balance sheets and more people will be under water in the sense that their homes are worth less than their debts. They are wiped out and when you are wiped out, when you have negative assets, it is going to put a dent in your confidence, you are not going to spend money, you are going to pull back and that general atmosphere of pulling back is the basic problem which is very difficult to deal with.