HuffPost Interviews Joseph Stiglitz: 'We're More Strict With Our Poor Than With Our Banks'
During the economic turmoil of the last few years, Nobel Prize-winning economist and Columbia University professor Joseph Stiglitz has been one of the most strident and incisive critics of the historic bailout of the banking sector.
Never one to mince words, Stiglitz, who served as the Chief Economist at the World Bank and on President Clinton's Council of Economic Advisers, has said the meltdown has resulted in a kind of "ersatz capitalism" in America. He has also repeatedly called for a second round of fiscal stimulus to support struggling Americans.
We recently sat down with Professor Stiglitz to discuss his new book "Freefall: America, Free Markets And The Sinking of The World Economy", and how the Obama administration should go about reshaping our economy.
With so much talk of a recovery, where is our economy right now?
The way I put it is that, if you look back before the crisis, the American economy was basically supported by a housing bubble, which supported a consumption boom. In one year, we had $950 billion in mortgage equity withdrawals. That got reflected in the statistics and our savings rate went to zero.
The implication is that post-crisis, even if we have our banking system work, it is not likely that we will go back to a zero savings rate in the U.S. If we don't go back to a zero savings rate, it's going to be hard to have a robust recovery unless you find something else to fill in the gap.
A recovery is predicated on the financial sector working, but obviously the sector isn't working. And there is another set of problems: Small businesses can't get loans. We are in that dynamic process now, where some of the things that we did [to steady the economy] have the characteristics of stretching out our economy's adjustments. These steps buoyed the economy in the short run, but may be more likely to extend the length of the downturn.
Our response to the crisis was party based on a fundamentally flawed theory. The theory was that we were having a psychological problem, and that if we could only restore confidence then the economy would go back to normal. Of course, we had a psychological problem, which was the bubble, but we're back to reality now.
This approach is having profound implications that are likely to last. In 2010, the projections say that there will be between 2.5 to 3.5 million foreclosures, more than the 2 million that occurred in 2009. So, that's an example of the dynamics going the wrong way, probably because we put in place the wrong policies.
In your book "Freefall", you suggest that the U.S. economy needs structural changes, rather than just cosmetic changes. Do you get the sense that the Obama administration shares that sensibility?
I think there are differences of view among those in the administration, as in any administration. But I think that one can read the proposal last week of a tax imposed on large banks on the basis of leverage to be a recognition that there is need to do more than a cosmetic change.
I think most people would say the tax has enhanced the equity of the bailout. But it's also an efficiency measure in two ways: first NOT to have the banks pay is subsidizing the financial sector, and that leads to a bloated financial sector. Second, the fact that the tax focuses on liabilities means that the Obama administration recognizes that part of the problem is excess leverage.
Does it go far enough?
No, it doesn't go far enough in several respects. First, as I point out in my book, this is not the first bailout that's come at the expense of American taxpayers or at the expense of taxpayers abroad. The banks have had an impressive record of bad lending all around the world. So, it is clear that the sector has been subsidized and is over-bloated. But, secondly, it's also clear that the sector proposes large externalities on the economy and the incentives structures at the organizational and individual level are such as to exacerbate the problem.
The tax is backward looking and is just attempting to recover [the costs] of this particular crisis. It doesn't look at all the other crisis, past crises and it doesn't create a fund for future crises. And it doesn't stop other forms of excessive risk-taking, like over-the-counter derivatives.