Yale professor Robert Shiller correctly predicted the bubble in tech stocks at the turn of the millennium and the housing bubble in the middle part of the last decade, so he knows a little something about bubbles.
When I interviewed him last week in front of a live audience at Motley Fool Headquarters, I asked him if he saw a bubble in... pundits making bubble predictions. Shiller, author of the new book Finance and the Good Society, explains the etymology of the word "bubble" and why he's trying to avoid using the term for now. (Running time is 1:55; a transcript is provided below.)
Brian Richards: We wrote an article which claimed that there was now a bubble in people making bubble predictions. It seems like every month somebody's calling for a bubble in gold or in the tech 2.0 IPOs of last summer or in bonds or whatever. Do you see a bubble percolating anywhere, and what's your view of people just so freely using that term with anything that has run up in price?
Robert Shiller: The term "bubble," by the way, do you know where it came from? It first appeared in French in 1720 as a name for a phenomenon called the Mississippi Bubble. There was a company, Mississippi Corporation, that on the French stock exchange was soaring, and so they called it a bubble. The tulip mania -- they didn't call that a bubble, because that idea, they called in Dutch "vindhandel," or "wind trade."
That's similar, the bubble imagery, but then the bubble term kind of got discredited with the efficient markets hypothesis, and you would never utter that word in respectable company unless you were a fool. Because they kind of proved that bubbles are a myth, the efficient markets, there are no bubbles. And people sort of believe that.
Now I remember in the 1980s very tentatively using the word in academic discourse, and I thought, I'm going to get in trouble, but I'm going to say it anyway. It had that feel to it. If you do a word count on Google ngrams, especially if you look for "housing bubble" -- bubble has too many meanings, so you can't search on "bubble" -- but the housing bubble, and I think also "speculative bubble," but more particularly a housing bubble. That's really a 21st-century phenomenon.
"Land bubble" is longer back, but I think it's coming into our favorite vocabulary. It's now a word that you can use all the time for dramatic effect, and it's maybe getting overuse, so maybe there is a bubble in the word "bubble." We'll maybe see a retrenchment back. I'm trying to avoid using it now.