The Money Man: Super-economist Joseph Stiglitz on how to fix the recession
A Nobel Laureate and former senior advisor to Bill Clinton, Joseph Stiglitz is the biggest brain in economics – and he predicted the slump years ago. In an exclusive interview, he talks to Sean O'Grady about 'crazy' capitalism, Britain's chances of recovery and why the banks must be punished
Tuesday 09 February 2010
Anger doesn't sit easily on the urbane, vaguely cuddly frame of Joe Stiglitz. His beard and open-necked shirt lend him an unbuttoned air, and he has the veteran teacher's ability to put the intellectually inferior at their ease, which I am grateful for. A career that includes a spell as Chair of the President's Council of Economic Advisers in the Clinton White House, chief economist at the World Bank and now a professorship at Columbia Business School has endowed him with patience. And yet I sense also some tension, that maybe he cannot quite struggle out from under the sense of pain many of us feel about the events of the last couple of years. Even in the calm, elegant surroundings of the Palm Court at London's Langham Hotel, where I join him for a cappuccino, his coffee his not the only thing that is, figuratively speaking, frothing away.
He is appalled that the banks have expressed "not a note of gratitude" about the funding and subsidies they have received from taxpayers "without which they would not exist", and that they have had the cheek to turn around and say that they don't have enough money to lend to small businesses or would-be homeowners, but that they have to spend vast sums of money raised from often hard-up taxpayers on obscene bonuses – amounting to $33bn in bonuses in the US alone. This perverse redistribution of income from the poor to the rich, a gigantic reverse exercise in the usual Robin Hood approach, is unprecedented in human history. The US government, Stiglitz says, was reduced to the role of garbage disposal service for the banks' toxic assets, bad loans and worthless securities they themselves had created. Why, Stiglitz asked, did the White House under Bush and Obama spend so much on keeping the banks going but so little on helping struggling homeowners, a policy that would have helped keep a roof over their heads, slow the slide in property values and protect the banks from the fundamental cause of their troubles, the crumbling value of securities based on those residential mortgages: "The current crisis has seen the government assume a new role – the 'bearer of risk of last resort'. When the private markets were at the point of meltdown, all risk was shifted to the government. The safety net should focus on protecting individuals; but the safety net was extended to corporations, in the belief that the consequences of not doing so would be too horrific. Once extended, it will be difficult to withdraw. Firms will know that if they are sufficiently big and their failure represents a sufficient threat to the economy – or if they are sufficiently politically influential – the government will bear the risk of failure."
The thing about Stiglitz – which he shares with one or two others, such as the governor of the Bank of England. Mervyn King, and the veteran ex-chair of the Fed and Obama adviser Paul Volcker – is that he just won't let go of the bankers. He is pleased that Obama has adopted the "Volcker principles" – a plan to break up the banks and prevent them doing anything too reckless – but says it doesn't go far enough. The world-weary response of the media and the politicians, after the immediate horrors have passed – to give in to the financial sector's blackmail, let things slide and hope for the best – is not for these men, and we ought to be glad that they keep banging on about what went wrong, who was to blame, and how we stop it happening again.
Not Stiglitz. He reminds us that the banks have effectively tried to keep "a gun to our heads", that says that if we don't keep them going on their terms then they will "kill the economy". Now, economics is not usually taken to be much to do with justice. The harsh "disciplines" of the market and the workings of Adam Smith's invisible hand are not about right or wrong but about efficiency, "optimal" distributions of resources, what are called "positive" or objective considerations, rather than subjective or "normative ones".
Stiglitz is an economist who naturally rebels at such naïve restrictions, the unnecessarily simplistic equation of economics with the outer reaches of conservative, free market theorising. Ideas of fairness, equity and justice are never far away from this philosopher-economist. Nor bravery.
He wants Gordon Brown – who he met for dinner yesterday evening – to hold his nerve, defy the markets and ignore those who want him to start reducing the budget deficit, which is pretty much everyone it would seem. Indeed Stiglitz suggests he keep some plans for a second fiscal expansion up his sleeve. When I suggest, as David Cameron has done, that some modest, symbolic trimming of the budget deficit this year might be enough to "appease" the markets, he recoils at the anthropomorphic stupidity of the idea.
"I've always been sceptical about the notion that the market is a person you can engage in an argument with, and that that person is an intelligent, rational, well-intentioned person: it is fantasy. We know that that person, the market, is subject to irrational optimism and pessimism, and is vindictive. If there is a speculative attack against you it is not an issue of appeasement but a judgement about whether they can break your back."
He goes on, with the confidence of a man who, as World Bank chief economist about a decade ago, watched such assaults on countries in the same way you might watch a Saw movie: "You're dealing with a crazy man, you're asking what I can do to placate a crazy man: Having got what he wants he will still kill you."
The professor appeals, instead to reason: "What I call 'fiscal fetishism' is really dangerous," he says. "Because cutting back means the economy goes into a downturn and the markets lose even more confidence, as it will trigger another recession or depression." If we do do that, he says, we will get the dreaded "double dip" recession. He urges ministers instead to tell the opposition and those short-sleeved, short-sighted, short-memoried traders in the City to consider the investment and returns that will come from all the public spending we are doing. It is true that the Government does seem to think that, for example, spending on our universities is just so much cash down the drain; for Stiglitz, certainly in the US, higher education remains a significant future engine of economic growth. Then again he is an academic.
In any case, he finds it "unconscionable" that the British Government is now being held to ransom by the very credit ratings agencies – currently murmuring about withdrawing the UK's AAA rating – which fouled up so badly over sub-prime mortgages and all those unfathomable securities that landed us in the mess we're in now. And if the markets won't buy our gilts – the bonds the Treasury issues to cover its vast borrowings (about £175bn this year) – he wants the Bank of England to be "cooperative" and buy them instead.
He is angry most of all on behalf of the 170 million people he estimates have lost their jobs globally because of this slump, and for the "ordinary taxpayers" now being asked to pay more taxes, defer their retirements and suffer poorer public services because of the greed of others.
"I sense in Greece and other countries under attack anger, that while financial markets started the crisis and governments got themselves into huge debts to bail them out and pay for the downturn, now the financial markets are punishing those same governments. You can imagine people feeling this irony, and it's not healthy." Indeed.
In his new book, Freefall, Stiglitz is at his most lapidary on the American financial interests responsible for dragging the world into its worst slump in three-quarters of a century: "The evident ability of the big banks to stop so much of the regulatory reforms that are needed is itself proof of taking action." Visa and MasterCard, he concludes, found it "easier just to hand out credit cards who anyone who breathed than to do the hard work of credit assessment and judge who was creditworthy and who was not".
He adds: "There used to be laws limiting interest rates – called usury laws. Such restrictions go back to the Bible, and have a long history in most religions – arising out of the even longer history of moneylenders (often described as the second-oldest profession) exploiting poor borrowers. But modern America threw the lessons of the dangers of usury aside. With interest rates so high, lending was highly profitable, even if some percentage of cardholders didn't repay what was owed."
The banks were not just avaricious, but "foolish", recklessly lending to those who could not possibly keep up their mortgage repayments after their initial sucker deal interest rates were withdrawn. "The wheelings and dealings of the mortgage industry in the United States will be remembered as the great scam of the early twenty-first century." Nor does he hold out that much hope of things changing. He points out that there are five lobbyists for every Congressman in Washington DC, and that there are 77 members of the House of Representatives on the House Financial Services Committee, its popularity mostly being accounted for by the fact that it guarantees a healthy flow of campaign contributions. "The called it a people's campaign," but the financial services industry, he adds, "contributed as much to the Obama election fund as all the small individual contributions put together". The system, he says, is "corrupt".
His sheer indignation at what he calls "the Great American Robbery" – that multi-trillion dollar bailout for the banks sanctioned by the Bush and Obama administrations – is as awesome as the sums involved, and as understandable. It is clear who he also holds responsible. Stiglitz, naturally enough, drips contempt for the failure of George W Bush to appreciate the enormity of what was about to hit the world – Bush's "cowboy boots and manly swagger" proving little substitute for the sort of intelligent, bold response to the crisis Stiglitz argued was on the way early on. Stiglitz does not draw the parallel, but all-too often President Bush sounds eerily like the President Hoover of JK Galbraith's classic account of the origins of the last Great Depression, The Great Crash, 1929. Both presidents spent much of their time expressing how the fundamentals of the US economy were sound, only to have their words greeted with another sell-off. Stiglitz seems set to be the left's chronicler and analyst of this slump – the man to stand up to the intellectual juggernaut of market orthodoxies, just as Galbraith was for a previous s generation.
Then again, Stiglitz, the most liberal of the liberal economic establishment in America, is even more disappointed in Barack Obama, because he admits he had higher hopes for him. Obama's attempts to "muddle though" the crisis, as Stiglitz puts it, leave him uncomfortably bracketed with his reviled Republican predecessor. Stiglitz seems almost as uncertain about the soundness of President Obama's current team, including economic adviser Larry Summers and Treasury Secretary Tim Geithner, as he is about the Bush team, drawn as it often was from Goldman Sachs and the other great Wall Street houses: "The entire series of efforts to rescue the banking system were so flawed partly because those who were somewhat responsible for the mess – as advocates of deregulation, as failed regulators, or as investment bankers – were put in charge of the repair."
As it happens, Brown comes off well in the comparison; "What Brown has done in terms of banks so far is far better than what the US did; he demanded better compensation for providing money, better accountability, better attempts to restart lending, than in the US."
The lesson Stiglitz takes from all this is a simple one: that markets can get things spectacularly wrong, as we have seen in this crisis, and cannot be allowed to operate in an economy without government intervention. This revelation, now so glaringly obvious but so heretical even a few years ago, is how he won his Nobel prize for economics in 2001. He and his co-authors showed how even the slightest deviation from the standard assumption taught to every A-level economics student – that all economic agents have equal access to information – can result in radically different outcomes to classic economic theory. Or, as we now might put it, what the banks knew and the rest of us did not.
In a world where no one under the age of 40 can recall a time when markets weren't automatically assumed to be efficient and best left alone, Stiglitz's break with those doctrines is violent. According to Stiglitz, far from free markets delivering a calm ocean of financial stability, they have delivered us a financial crisis, on average, every year or two. Moreover, they are completely unsuited to the new challenges of pricing-in environmental damage and degradation – "externalities" in the economist jargon.
The golden age of economic prosperity, he points out, came in the quarter-century or so after the Second World War, when the banks were tightly regulated by the rules that were drawn up after the Wall Street crash of 1929 and the Great Depression that followed.
His vocation was felt early on. He says: "I'm from Gary, Indiana, a steel town on the southern shores of Lake Michigan. As I grew up, I saw persistent unemployment, which grew much larger as the economy faced one downturn after another. I knew that when people in my town faced hard times, they couldn't go to the bank and get money to tide them over. I saw racial discrimination.
"As I began to study economics, none of these conclusions of neoclassical theory seemed to make sense to me. It helped motivate me to look for alternatives. As graduate students, my classmates and I argued about which of the assumptions of neoclassical economics was critical – which was responsible for the 'absurd' conclusions of theory."
He is closer to that ambition today: "You can say you're angry, but for me it is more out of sorrow than anger. The crisis was predictable. And I hoped that it wouldn't happen and I thought we in the US and UK could do better because we had democracy. The game isn't over yet I hope."
Today, on Stiglitz's 67th birthday, he can at least take some satisfaction in the way that the world is coming around to sharing his anger at the absurdities – and the obscenities – of market economics.
Freefall: Free Markets and the Sinking of the Global Economy by Joseph Stiglitz is published in hardback by Allen Lane (£25). To order a copy for the special price of £22.50 (free P&P) call Independent Books Direct on 08430 600 030, or visit www.independentbooksdirect.co.uk
Joseph Stiglitz: On economics
* "We have the good fortune to live in democracies, in which individuals can fight for their perception of what a better world might be like. We as academics have the good fortune to be further protected by our academic freedom. With freedom comes responsibility: the responsibility to use that freedom to do what we can to ensure that the world of the future be one in which there is not only greater economic prosperity, but also more social justice." Nobel Prize Lecture, December 2001
* "Never has the need for international organisations like the IMF, the World Bank, and the World Trade Organisation been greater, and seldom has confidence in them been lower. The lone superpower, the US, has demonstrated its disdain for supranational institutions and worked assiduously to undermine them." Making Globalization Work, 2006
* "The truth is, most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal." Vanity Fair, January 2009
* "[The banks] not only didn't innovate, they actually resisted innovations that were important. It was heads I win, tails you lose. And you lost." Speech at Columbia University, February 2009
* "What the Obama administration is doing is far worse than nationalisation: it is ersatz capitalism, the privatising of gains and the socialising of losses. It is a 'partnership' in which one partner robs the other." New York Times, March 2009
* "Obama's policies have made a difference. But he and his economic team have made several critical mistakes. They underestimated the severity of the downturn. As a result, the stimulus programme was too small." NY Daily News, January 2010
* "The only surprise about the economic crisis of 2008 was that it came as a surprise to so many." Freefall, 2010
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