Robert Shiller Explains The Financial Crisis In One Paragraph

The following comes from Shiller’s recent interview in Social Science Space. It’s one of the most concise explanations of what happened and why most economists missed it:

“Robert Shiller: That’s right; well conventional economics misrepresents what our best interests are. A great example is the financial crisis that began in 2007. The way it began is home prices started falling rapidly. Many people had committed themselves to mortgages and now the debt was worth more then the house was worth,they can’t come up with the money to payoff the mortgage and so it kind of lead to a world financial crisis. So why did that happen? Conventional economics theory can’t seem to get at the answer, which I would say is, we had a speculative bubble driven by excessive optimism, driven by public inattention to risks of such an eventuality. And errors in managing the mortgage contracts that were made. There are no errors in conventional economics: it’s all rational optimisation.”

The rest of the interview is actually better, but this part stood out due to its simplicity and directness….