Nobel Prize Winner who predicted GFC warns economy is about to go belly up

Nobel Prize Winner Robert Shiller thinks the economy is about to go belly up. Source: Getty

Nobel Prize winner and economist Robert Shiller, dubbed Dr Doom, accurately predicted two economic crises – and now he’s making predictions about a third.

Shiller predicted both the ‘dot-com’ bust (the 78 per cent fall in the Nasdaq between 2000 and 2004) and the collapse in the US housing market that led to the global financial crisis in 2008.

In his new book Narrative Economics, Shiller is now warning economists they’re missing some major red flags about the economy.

The bursting of the US housing bubble in 2006 and 2007 played a major role in the 2008 GFC, with sharp declines in house prices forcing the subprime mortgage crisis and, ultimately, a recession.

And Shiller said we’re here again.

“I have seen this happen before. We’re back in 2005 again when the rate of increase in home prices was slowing down a lot but still going up,” he said.

“It would not take me be any surprise at all if in the next year or two we saw modest declines in home prices and if things play out right, there could be bigger declines. It has happened before on a number of occasions.”

Robert Shiller’s ‘narrative theory’

Stories and beliefs have the power to move economies, Shiller explained in his new book.

“It is very important, if we are to have a substantial understanding of the kinds of big economic events that have surprised us so often, that we have some scientific methods of studying the narrative elements of these,” he said.

Shiller discusses his observations on what makes narratives go viral, like the ‘get rich quick’ narrative that led to Bitcoin’s surge in popularity, and US President Donald Trump’s ostentatious lifestyle narrative.

Shiller said the "new Trump narrative encourages spending and encourages their reluctance to want to depend on social insurance".

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Yahoo Finance’s All Markets Summit is on the 26th of September 2019 at the Shangri-La, Sydney. Source: Supplied