Nobel Prize Winner Stiglitz Talks at the U.N. about the Global Financial Crisis
By Joan R. Magee
February 24, 2009
More than a 1,000 people registered for an event at the U.N. today to hear Professor Joseph Stiglitz, Columbia University Professor and winner of the Nobel Prize in Economics in 2001, speak about the global financial crisis. He wrote “Globalization and its Discontents,” which outlined the problems with globalization.
It was not so long ago that the world economy seemed to be booming, so what happened? And what are some ways out of the crisis? To put it simply, in the U.S., we had a bubble. That bubble was broken and the banks are broken, according to Stiglitz. There will be a continual unraveling as the process of deleveraging goes on.
In other words, the worst is yet to come.
This notion lends itself to what Professor Stiglitz calls the greater macroeconomic crisis. The flood of liquidity and lax regulations in other countries bled into an underlying global concern: insufficiency ofaggregate demand.
Nonetheless, GDP indicators didn’t give notice that we were living on a false basis, which is a critique of our GDP indicators, and more widely, regulation.
Stronger and deeper regulation will cause controversy, says Stiglitz, because many people in the Wall St. system have walked off with millions, sometimes hundreds of millions due to the past system of lax regulatory bodies.
“They will talk about the harmful effects of regulation on innovation,” says Stiglitz. But the financial system in the U.S. before the credit crunch and economic downturn was “bad,” according to Stiglitz.
“It didn’t mobilize savings,” he says. “It didn’t allocate capital beyond peoples ability to afford and created risk rather than mitigate it. It innovated in ways that led to temporary high profits, but not in ways for average Americans to manage risk. A simple one: How to stay in your house without being kicked out.”
There are deeper reforms needed then. There’s a problem with the plumbing and the problems are yet deeper. The problems are symptomatic of modern versions of American-style capitalism.
“The banks had grown too big to fail and it becomes a one side heads or tails,” says Stiglitz. “Heads I win, tails you lose and now people are losing.”
What are the two reasons we have an insufficiency of global aggregate demand?
In terms of globalization, all countries are closely linked. “We exported our toxic mortgages and thanked the rest of the world for buying all the garbage,” says Stiglitz. “We exported deregulation.”
Disorderly unwinding
Part of the story of these global imbalances is the fact that many emerging markets have felt a need to have a build up of large reserves. In the past eight or nine years, it’s been trillions of dollars, in Asia and the Middle East.
“We mismanaged the last global financial crisis of 1997 and 1998,” says Stiglitz. “I talked to a lot of ministers from emerging markets, and they said never again will we give up our sovereignty to the IMF and we have to protect ourselves.”
There’s no global system of insurance, so countries built up income people earned, but didn’t spend to create a buffer. Individually, it makes sense, but globally, it means a lack of aggregate demand worldwide.
The one country that was the consumer of last resort was the U.S. “The richest country in the world can’t consume beyond its means to keep the world going. It’s very flawed and it’s what we had. And if we don’t do anything about this, it will get worse,” says Stiglitz.
He says that even more reserves will be saved if reforms on the global reserve system. The U.S. dollar to a two-currency or three-currency reserve system could make the system even unstable. According to Keynes, the IMF should have been the global reserve system. The U.S. vetoed it, which Stiglitz called “short-sighted.”
Though we didn’t do it in 1944, now is the time to do so, according to Stiglitz.
Looking ahead
One of the innovations of the financial markets was to allow people to spend way beyond their income, and this was, obviously, a recipe for disaster. Being cognizant of the problem of inequality is important, but some of the solutions and bailouts may exacerbate the problems.
“We are bailing out bankers, and cutting back on our social security system,” says Stiglitz. “The
amount of money going down the drain without showing anything for it is staggering and we’ve gotten nothing for the billions spent on TARP.”
There was a myth of decoupling, that China would keep growing. But according to Stiglitz, in a global, integrated economy you can’t have a crisis in the largest economy without exporting it elsewhere.
During American’s boom time, some countries didn’t follow the advice of the U.S. and didn’t open or
deregulate their markets and are now doing better than the U.S. But no financial system can be resilient against a deep enough economic downturn. It then ricochets against the U.S. and so it’s in the interest of the U.S. for a global economy. There are impediments to doing that. The first problem is that the developing countries don’t have the resources. China does, but the poorer countries don’t.
And now America is spending close to a trillion to try to get out of the hole; other countries can’t do that. If the U.S. doesn’t give them the resources, Stiglitz concludes, then the developing nations will
stay impoverished and only prolong the ever-worsening American recession.
“For economists, this is the most exciting time,” says Stiglitz. “I think we’ll come to realization that institutions created 60 years ago are not up to the task. So we’re looking forward to a new Bretton Woods moment and prevent a recurrence in the future of this downturn.”
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