Yale economist Robert Shiller discusses the causes and consequences of the global economic crisis.

'Plugging Holes in a Sinking Ship'

SPIEGEL: A number of US economists are opposing the state intervention and are instead calling for the the markets to be allowed to restore order themselves. Are they right?

Shiller: The Republicans are right that free markets matter a lot. A bailout of this magnitude is not something you want or expect to happen in a free market system. Because it's really abrogating contracts and changing the rules after the fact.

SPIEGEL: The pure teachings of the free market system are often violated in the country considered the home to modern capitalism.

Shiller: That's true. What we are doing here is not unprecedented. What we are doing now is entirely in the same spirit of what was done in the last major financial crisis in the 1930s. Back then, the government bought 20 percent of all individual mortgages in the country. If adjusted for inflation, the value of that program today would be $750 billion. On top of that, they also set up a federal authority to insure mortgages. We are not establishing a new precedent at variance with free markets. We are doing what people expect us to do when there is a major crisis. I don't think these new doubts about the capitalist system are justified.

SPIEGEL: Doesn't it pain you as an economist if the action now being taken simply ignores your noble theories?

Shiller: We are seeing a collapse in confidence. That's a psychological phenomenon. Most financial theories are not adept to it. What we're seeing here is a social epidemic. We saw a social epidemic of ubridled enthusiasm for real estate investments on the upside. And now we are seeing the reverse -- an epidemic of declining confidence. These are hard to manage, and there is no really solid theory.