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February 20, 2009

Stiglitz on the Economy: Too Little, Too Late (but Better Than Nothing)

Catherine New
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“It was very good that Greenspan used the N-word,” Professor Joseph Stiglitz said in reference to bank nationalization at last night’s community forum on the economy. Stiglitz said that temporary nationalization is “not that big of a deal” and that it is essential to changing incentive structures.

“When the economy recovers, you privatize again,” he added.

Bank nationalization was just one of many topics the Nobel Prize–winning economist covered in his 70-minute talk, which was streamed live on the Columbia Business School Web site as well as on the Huffington Post. Stiglitz opened by discussing the macroeconomic view of the financial crisis, citing two factors that are now playing out: the growing economic inequality in most countries and the aftereffects of the 1997–98 East Asian crisis. He called the management of that crisis “miserable.”

“The consequences of the IMF and U.S. Treasury were such that affected countries said ‘Never again,’ and they felt it was just too risky not to have huge reserves,” he said. “Now [those countries] are living within their means, and there is one country that was the consumer of last resort. That was the U.S. That game has now changed — and that’s the important part. It will be difficult for the U.S. to continue to live beyond its means.”

Stiglitz went on to discuss the three aspects of the government’s response to the financial crisis.

On the stimulus: “The consensus was that it was not enough. It is trying to offset deficiency in aggregate demand, but it’s just too small … The guiding principles for a good stimulus are that it should be designed with high multipliers, it should be fast-acting and should address long-term problems … but this is not designed as it should be.”

On the housing initiatives: “Try to get people to refinance mortgages and get interest rates lower. Part of the problem is that homeowners still can’t afford these mortgages, so the government is trying to provide incentives to lenders to refinance and provide lower mortgage rates, but it is difficult because people have no equity left and have no money to take out a new mortgage. The general feeling is that this will only help a fraction.”

On fixing financial institutions: “It is pretty clear that TARP 1 — the first $350 billion — did not work. It gets an F or F–, depending on your grading structure. What we squandered on our banks would have fixed Social Security for several generations … This is close to a zero-sum transaction. The losses are there and people are talking about moving those losses from one part of the balance sheet to another, but those losses don’t disappear from society. They are still there. Most of what’s happening is just moving things around with financial alchemy. It’s not quite zero-sum because it can be a negative sum if you don’t get it right … People talk about the greed of bankers in taking the money the government gave them and using it for bonuses, not recapitalization … Well, they were doing what their incentives told them to do … A big mistake the government has made is that it has confused its ability to make loans with its incentive to make loans.”

Read the live Twitter feed from this event.

Photo credit: Apesphere

Comments

by Whither Socialism!! | February 23, 2009 at 2:40 AM

Dear Prof. Stiglitz, I heard about you about the heady days of globalazition while I was a post-graduate student at the University of Hannover, in Germany. I am missing your book - Whither Socialism? Now everything has been vindicated. Your insight could only have come from God. Where can I buy your book? Stiglitz fan. Patrick Ajwang kenya

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