[This interview published in: Berliner Zeitung, October 9, 2008, is translated from the German on the World Wide Web, link towww.berlinonline.de. Joseph Stiglitz is one of the leading economic experts of the world. The winner of the Nobel Prize for economics, is a former chief economist of the World Bank and advised US president Bill Clinton from 1997.]
Q: Professor Stiglitz, are you afraid?
J. Stiglitz: I am not afraid but rather alarmed because of the financial crisis. A high degree of insecurity prevails. These are extremely risky times. For me, it is a kind of Deja-vu. It reminds me of my time at the World Bank ten years ago, when the Asian crisis broke out. The difference is only that people in Thailand and Indonesia were stricken at that time. Today Americans and Europeans are affected. Today’s crisis is four times greater than ten years ago.
Q: How long will all this last?
J. Stiglitz: No one knows. We also do not know how bad it will be. What calms me a little is the fact that we can deal better with these crises today than in the time of the Great Depression in the 1930s. We have the knowledge and the tools today to defy a crisis. I also know we can deal wrongly with this crisis, as for example in the Asian crisis when the International Monetary Fund and the US government managed the crisis very wrongly. This led to terrible consequences for the impacted countries. Now we have a US president who has proven his incompetence many times – think of the Iraq war or the current crisis. In truth, the US government with the Federal Reserve and the Treasury department first created the financial crisis. Will this triumvirate help us in a real mess? I have my doubts about the $700 billion bailout plan.
Q: What is wrong here?
J. Stiglitz: The bailout plan is wrong. While better than nothing, there were wiser alternatives. The plan is based on the assumption that the enormous sums thrown at Wall Street will “trickle down” somehow on the overall economy. Something may trickle down. Still this isn’t very efficient, is it? The patient suffers massive internal bleeding and is given a blood transfusion. The banks lent money and accepted inflated assets as security. This bubble burst; the securities are worth nothing or very little.
Q: There are now ten million too many houses or apartments.
J. Stiglitz: This is an extreme problem and greatly burdens the national economy. What people like US Treasury secretary Henry Paulson and Federal Reserve chairman Ben Bernanke do not understand is the fact that this is more than merely a temporary crisis of trust. Real mistakes were made in awarding credits. Now there is excess on the housing market. By the way the most unbridled awarding of credits first happened in 2006. This is like embezzlement. No one noticed when only a few embezzled. Then more and more fraud s occurred until things exploded. Banks have three core tasks: stimulating saving, managing risk and allocating capital efficiently by awarding credits. Our banks have failed in every regard: the savings rate in the US is zero, there was poor risk management and capital was completely misdirected. Now there is disaster.
Q: What will happen now?
J. Stiglitz: The question is who will pay the costs. The banks propose taxpayers bear the costs. Those who pocketed profits for years want to pin the losses on the taxpayer. This is sheer redistribution from bottom to the top. On top of everything, the banks claim the government will even make a profit at the end with this bailout plan. If this were true, why don’t they sell these worthless papers to each other? Why do they so vehemently refuse that losses in the future be offset with profits if there will supposedly only be profits at the end? They fear such regulation as the devil fears holy water. The plan does not impose any obligations for transparent accounting. This is an invitation or free rein for corruption. The banks simply want to be compensated at the expense of taxpayers. But this plan is better than nothing.
Q: What went wrong with US banking oversight?
J. Stiglitz: On one hand, there was this widespread attitude of market fundamentalism that the market will always lead to the best result and that deregulation is necessary since the state only stands in the way of the market. On the other hand, the regulators themselves are persons at the top of the state authority. With Alan Greenspan, we had a central banker who championed deregulation and did not use those tools available to him.
Q: What will be the consequences of the crisis for American society?
J. Stiglitz: What enrages most Americans in the current situation is that those who earned spectacular incomes and bonuses through reckless conduct in the last three years – the financial sector garnered around thirty-percent of business profits – now seek a rain of money at the expense of taxpayers. The justification for the high incomes and bonuses was always that these people ensured an efficient functioning of the economy. They did not do this, as people now see. This striking disproportion between private advantage and the consequences of their actions rightly infuriates many. Inequality has soared in the last eight years. Most people in the US have a harder time today than eight years ago.
Q: Is the bailout plan part of a greater “New Deal,” as under President Roosevelt in the 1930s?
J. Stiglitz: No, not at all! If we had a president Roosevelt, things would look very different. Roosevelt would tackle the core of the problem and try to help millions of people who lose their homes. How can these persons be helped? Not by supporting the rich who can deduct the interest payments for their credits from their taxes. If these tax cuts were changed into tax credits for low wage earners, many would be helped. Instead of crafting a stimulation package, president Bush declared he would veto any bill improving the system of unemployment benefits. The US has the worst unemployment support in the western world. An unemployed person is out after 26 weeks. Finally, a “New Deal” would do something for the communities suffering under an enormous shortfall of tax revenues. Their infrastructure is stagnating.
Q: Would you say we are at a turning point with the end of finance alchemy?
J. Stiglitz: This is certainly a decisive moment. One thing is certain: the philosophy of deregulation is dead. Americans say: okay, if we rescue the banks and the financial system, we will have a chance this will not happen in the future. But remember, this has now happened repeatedly every few years. Think of the crisis of savings accounts at the end of the 1980s, the stock bubble of the 1990s, Enron, Long Term Capital Management and so on. These people put a pistol to our heads every time. This is simply extortion. Demands are made on taxpayers and that’s the end of that. But now I hear these people whispering to Congress not to over-react. Innovation must be possible in the future so they can continue as in the past. For a long time, the banks will be more conservative and award credits in a less unbridled way. A new generation of bankers will arise who will be “more dynamic” and strive for higher profits. Then everything will begin again from the beginning.
Q: Is this the end of neoliberalism, as you suggested in a recent article? The British journal “The Economist” wrote recently the US government nationalized banks faster than one can say the name Hugo Chavez.
J. Stiglitz: Neoliberalism like the Washington Consensus is dead in most western countries. See the debates in South America or other countries. The US has lost its role as the model for others. Everyone only laughs when US technocrats give lectures in other countries and say: “Do as we do, liberalize your financial markets!” In America, there are all kinds of explanations for what is now happening. Some say, the government is responsible. The government encouraged awarding credits to the poor population. Financial institutions that took excessive risks are responsible for the misery. These repressed risks were repackaged and resold. Now they try to claim innocence and put the blame on others.
Q: What will be the consequences of the crisis in the US?
J. Stiglitz: In the short-term, the crisis will intensify the people’s frustration because they see the economic system obviously exists for a few, above all for Republicans and their economic philosophy, not for all Americans. They say free market and mean only the well being of several corporations or conglomerates. Instead of competition, they rely on the instrument of direct no-bid contracts, as for example for all military suppliers for the Iraq war. Americans now face an economic collapse, which will probably help Barack Obama in the presidential election.
Q: What does the crisis mean in the long run?
J. Stiglitz: The crisis divides society. A few months ago the president vetoed a law mandating health insurance for poor children. That would have cost a few billion. The president said that was too expensive. Now the government raises several hundred billion overnight to save the banks.