Economic outlook from Robert Shiller

Professor of economics at Yale and co-creator of the Case-Shiller House Price Index, as well as the forthcoming MacroShares’ Major Metro Housing product:

Another thing is risk management with regard to housing, for example. We have a huge mess-up here, because people have been urged by experts and by national leaders to invest all of their life savings in a single risky investment, a home in a city, in a leveraged way. They would borrow 80 percent, 90 percent, or even more of the money to buy the home. And so they’re putting their life savings on the line in a crazy way. So this shouldn’t be the new normal; but we have to then redesign our mortgage institutions.

We have over 12 million people who are underwater—that is, they have negative net worth in their homes. And, typically, these people have nothing else, so they’re wiped out. How can it be that we were anywhere close to the right system? There are some people who doubted it would ever happen. I’ve talked to these people, and it seems to be often based on the assumption, one way or the other, that home prices would only go up. Well, we’ve just learned that they don’t just only go up.

We didn’t have the right system. It was normal. We thought that the conventional mortgages that were being issued represented some kind of enlightenment, but that was a group thing. That was taking for granted that what we have now is right, and it’s not right. So it has to be fixed. So I’m hopeful that this event that we’re going through now will trigger a lot of institutional rethinking that will make our economy work better.

SOURCE: The McKinsey Quarterly

Is this a good idea??!!

Robert Shiller, of S&P/Case-Shiller House Price Index fame, is set to launch a new financal derivative product this month

MacroShares’ Major Metro Housing product, brainchild of economist Robert Shiller, will offer investors a way of betting on rising house prices by buying “Up” shares, or expressing pessimism via “Down” shares. Unusually, these won’t be backed with the underlying physical housing assets.

Instead, MacroShares will be tied to the Standard & Poor’s/Case-Shiller Composite 10 Home Price index. When the Up and Down shares float, proceeds will be invested in U.S. government bills to ensure liquidity. If the index moves up, the trust behind the Down shares will shift a corresponding portion of its assets to the Up shares trust, raising the net asset value underlying the Up shares. The prices should follow.

Aren't financial derivatives tied to real estate what helped us into our current global financial mess? Or will the ability to invest in "Down" shares balance the optimism that led to valuations at 30x with mortgage-based securities?

Let's just hope AIG isn't planning on insuring your investment in Major Metro Housing!

SOURCE: WSJ