If America allows disaster to befall its economy, it would be like Coca-Cola "poisoning its own drinks", according to the Nobel prize-winning economist, Robert Shiller. The Yale professor was one of three US stock market experts to receive the prestigious prize last week for insights into the role that stocks, bonds and property play in driving economics. Speaking to The Sunday Telegraph after his win, Shiller said that America had teetered on the brink of a disaster that could have seen the world's largest economy ruin its reputation.
"It would be losing a brand name, almost like Coca-Cola poisoning some of its bottles. The US brand name for government debt is [also] very strong - it would be the height of foolishness to damage it. It's also a matter of pride in the nation's integrity," he said. A default would shatter confidence that America would always repay its debts and unsettle a population already "more polarised than I have ever seen in my lifetime", he said. However, he argued that American investors were likely to regain confidence if negotiations to increase the country's borrowing limit go all the way to the new deadline of February 7.
The country was on course to breach its $16.7 trillion debt ceiling last Thursday until politicians in Washington agreed the temporary extension. "I think people know it is a show. People watch television a lot. They know when something is a show - they have an instinct," said Shiller. The celebrated economist, best known for predicting the dotcom bubble in 2000 and the housing crash seven years later, won his accolade for work demonstrating that stock markets are often driven by emotion. His price to earnings ratio, known as "Cape" (Cyclical Adjusted Price to Earnings), smooths earnings over a decade to capture lasting value in equities and has a global following.
Shiller is good-humoured and remarkably down to earth for an academic of his stature. He shares his prize with Lars Peter Hansen, a specialist in mathematical modelling, and - somewhat uncomfortably - with Eugene Fama, a Chicago professor who says stock markets are rational, and that investors can be relied upon to respond to facts. Shiller noted that Fama "doesn't believe in the concept of a bubble".
The trio were informed on Monday that they had received the Nobel prize, when Shiller had to dash out of the shower to take the call. Ever since, he has been deluged with emails. He was not altogether surprised, but did not expect to share the award with Fama. "That came as a complete surprise," he said. "It's a little bit like going on a vacation with some people with a very different religion. I'm imagining Muslims, but it could be Buddhists or Hindus. It's all fine, but there are certain basic issues which you don't bring up.
"The fact that value stocks outperform, [Fama] doesn't see as a sign of any irrationality. He sees it as a sign that there are certain risk premia. It is almost like religious people put a certain slant on everything they do. I always say, 'That's fine. I'll humour you. Whatever you say.'" Fama might not believe in bubbles, but Shiller does. At the moment, he is concerned that there is another housing crash on its way, including in Britain.
"There has been a change in public attitudes towards real estate, particularly owner-occupied homes, which makes the market more speculative," he said. "Once people think the market is volatile, then they are vulnerable to panic buying or panic selling, and it makes the market more volatile. It's a self-fulfilling prophecy. "Home prices were depressed by foreclosures, and we have run through a lot of those and prices have gone up a little bit. It seems like there is a 'flipping' opportunity right now." Historically, one of the most surprising jumps in house prices was in 1943, Shiller said.
The Second World War was still raging and many economists feared the US would slip back into the Great Depression. The American public thought differently. They expected a return to "sunny days", with an influx of returning soldiers needing homes. Their political predictions were a little premature, but the logic was fundamentally sound. House prices rose and continued to rise for many years.
Although he won his prize for empirical analysis, Shiller said he remains instinctive as an economist. "Sir Alfred Marshall, the great British economist, said 100 years ago that economics is not an exact science. The problem is, it's about people. When you try to forecast something, you are trying to predict what someone is going to do. I don't think you can exactly." He has high regard for Janet Yellen, the soon-to-be chairman of the Federal Reserve, for paying close attention to human behaviour. Indeed, the pair know each other well. Shiller has co-authored books with her husband, George Akerlof, another Nobel laureate. "It's almost like she's my sister-in-law," said Shiller.
"The thing about Janet and her husband is that they're such nice people. They're considerate and they don't seem to care about money or wealth. "I think it's good to have a woman in that job - it'll be a nice change. Women are more people-oriented. Maybe I'm repeating a stereotype, but it seems that way."
Shiller also credits the influence of another woman, his psychologist wife, Ginny. She has helped to inform his focus on "story stocks", where hype can obscure fundamental value. The recent performances of the "ultimate story stock", Apple, and its peers have stoked fears of another dotcom crash. Shiller does not appear too concerned. His gauge shows the S&P 500 is 24.1 points - or 46.1pc - overvalued, higher than before the 1987 crash. Even so, he does not expect the bull run to end yet.
"It could keep going up for years," he said. "Under our Cape ratio, it is just at something like half of its peak in 2000." Shiller has his money in the energy, healthcare and industrial sectors. But he admitted: "I'm not the best investor. I'm too busy."