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Robert Shiller: Yellen Is Right About Overpriced Markets
Aspire, Thought Leaders | 11 May 2015
By: Vance Wong
Articles (74) Profile
Source: CNBC

Yale economics professor Robert Shiller agreed with what US Federal Reserve Chairwoman Yellen said in a recent panel discussion on Wednesday with International Monetary Fund (IMF) Director Christine Lagarde. However, it quickly became a comment speculated and feared by many to be her own moment of “irrational exuberance.”

Feds Market Spook Is Right

Source: USNews

When asked to comment about Yellen’s recent comment in her speech, Shiller was in agreement with Yellen and mentioned that the Feds are doing it right. He thinks that the Feds disturbed the “tranquility” of the market by making such a comment but that should be their job.

Yellen recently claimed that, “equity valuations at this point generally are quite high.” To soften the impact of that statement, she reassured investors that prices are on the high side but not ridiculously overpriced, stating that she do not see a bubble forming.

The phrase “irrational exuberance” was first coined by former Fed chair Alan Greenspan in 1996 when he described the stock market, and in a way initiated the market crash leading up to the dotcom burst. Yellen’s comment definitely did have an impact as prices start their decline on that day, with the Dow Jones Index (DJI) dipping more than 100 points.

QE Saved Us From Market Depression

Source: BBC News

Shiller was asked to comment about the very possible cause of the current inflated prices in the market: Quantitative Easing (QE) policies that were employed in the first place. He was quick to say that he is a supporter of that policy, simply because it was a “new experiment” and no one knew its impacts for sure.

The author of a book “Irrational Exuberance” that was named after Greenspan’s infamous phrase, Shiller, pointed out that the Feds “had to do something.” The US market was facing depression and QE salvaged the situation, though it did cause a “boom” in the housing and stock market.

However, is this not why Yellen thinks that the market prices are on the high side right now? It brings about a question of whether QE was actually a good solution, given that it is something currently employed by Japan. The results of that QE policy does not seem to be really justifiable.

QE Also Created New Problems

As such, Shiller was also asked if he thinks that the long-term consequences like declining productivity and growth justify the short-term ‘solution’ employed by the Feds. He stated that the a huge part of productivity growth lies in the investors and businesses’ confidence even in face of a potential financial crisis.

Essentially, if the investors and business owners were to be overly panicky about market prices and movements and pull out prematurely, it would definitely pose a problem. The economics professor sees potential in the innovation of the US and pointed out that the country ranks high on the global innovation scale, which could be one of the key solutions.

Nevertheless, investors should take the advice of Yellen and Shiller and realise that the markets are generally on the high side and maybe even overpriced right now. It is also still unclear when the interest rates will rise, but Yellen did mention in her speech that the Fed will do “its best to communicate clearly” so as to not create too much of a surprise.

With a Communications background, Vance has the passion to write with a purpose - to provide content supported with substantial evidence to vested readers.

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