Business professors debate future of nation's economy

Stock market guru and Wharton Finance Professor Jeremy Siegel and Yale University Economics Professor Robert Shiller exchanged opinions on the direction of the American economy yesterday. Siegel -- who has appeared on almost every major cable financial news show -- and Shiller ended up in a heated discussion yesterday before a filled 970-seat Zellerbach Auditorium. As the first Ashish and Sapana Shah Speaker Series lecture, the heated discussion was also a component of the Joseph Wharton Scholars Program. The talk came at a time when the Nasdaq has dropped 60 percent off its all-time high in March 2000 and investors are worried about the future of their portfolios. Interest in the day-to-day operations of the stock market has skyrocketed. In front of students, faculty members and administrators, Siegel and Shiller addressed concerns about the boom of the late 1990s and the losses of the early 21st century. Shiller maintained a considerably more pessimistic view than Siegel, noting that the only other similar period of expansion occurred during the decade prior to the Great Depression -- the most recognized crippling period of the American economy. "People are coming back to reality, and that is the reason for the downturn," Shiller said. "I do not have a terribly confident forecast." "We are on the verge of a recession," Siegel said. "Most of my friends who study this believe the odds are 50-50 at this point." While the two professors study similar topics, they hold diametrically opposing views on how to evaluate stock pricing and how valuation determines long-term growth. In Shiller's study of topics like behavioral economics, moral judgments in investments and the cultural aspects of finance, Shiller has developed several explanations for the "irrational exuberance" exhibited between 1982 and 2000. Shiller attributes much of the growth during that period to "amplification mechanisms," including the mass media and the Internet. "It is almost like a 'ponzi scheme,"' Shiller said, in the sense that people interpret positive feedback and convert that into increased consumption and heightened confidence. However, once that confidence erodes and expectations deflate, the bubble bursts, according to Shiller, who views this as one of the reasons for the current decline in U.S. markets. In spite of drops in all three major U.S. markets, Siegel said that he still believes in the stability of stocks in the long-run. "I am still bullish long-term," Siegel said. "The markets are coming down but, historically, are still very high." The issue of short-run performance interested most students, as members of the audience asked about the power and role of the federal reserve regarding the markets. They also asked about the prospects of finding a job in finance. "I think that people were expecting Siegel to say that 'it would all be OK', but he didn't," said Matthew Nimtz, the co-president of JWS. "This might have alarmed people."