Joseph Stiglitz’s Short-Term Economic Prescription

Card: What’s your advice for fixing the economy in the short-term?

Stiglitz: The short run is more difficult and I think we have to be recognized.  We are in for a long difficult problem.  Things have not even reached the bottom.  One of the problems that we face is not only that we’ve lost confidence in our financial institutions, we’ve lost confidence in those who are supposed to be managing our economy.  I can, you know, tell you for a fact, you know, they were going around Europe, for instance, [IB]… 7 meetings and saying… last may, saying, “We’ve turned the corner, you know, things are turning up.  Things are going well.”  Clearly, they were either doing a sales job or they didn’t understand but either case, why should anybody listen to these guys again?  They’ve been so consistently wrong.  So, the… the… there this crisis of confidence, the problems are going to get worse.  We’re only about half way through the [IB] housing prices.  Housing prices go down, more foreclosures will occur.  Half way through, assuming we don’t overshoot, that is to say, when you have a bubble, when the bubble breaks, you don’t typically go back to the normal level, you go further down and then you bounce back up.  So things may be even worse than what I just suggested if there is overshooting.  Secondly, stakes and localities are facing serious problems, revenues are plummeting.  Here in New York, cities in New York State depends very heavily on revenues from the financial sector, it’s plummeted.  But stakes and localities depend on what you call a balance budget framework, when revenues go down, they had to cut back expenditures and as they cut back expenditures, the economy goes further down.  I said several months ago that the first agenda in stimulus ought to be the make up for the sure fall in this state and… local revenues ‘cause if you don’t, you’re going to have downward pressure on the economy, cut back of services to the poor, cut back of investments that would be the basis of long term economic growth but the Bush administration decided to give a tax cut.  They think the tax cut is a solution to every problem, the tax cuts were part of the problem.  The problem of America is not that we consumed too little, with the savings rate of zero, how could anybody say that?  Yet, that was the solution that the Bush administration put forward.  So, the future cut backs in the state and local expenditures are going to depress the economy, as the banking sector faces problems, they’re going to be more reluctant to lend and as people see their houses, price go down, they’re going to be more reluctant to borrow.  The lack of transparency means that even banks won’t lend to each other so if there’s a bank with money, it’s not [IB] ‘cause it doesn’t know what the risks that it faces are.  So I think we’re… you might say, “Only in the first half of this game,” and I would expect that the problems to continue to unfold.  I think we’re in a very difficult position because the people that we turned to, traditionally, have been the financial markets.  And the two reasons not to trust them, at this point: first, they’ve shown enormous incompetence.  Why should we trust these people who got us into the mess to get us out of it?  Their judgments, their understanding of the economy is very, very limited.  They understand how to make money, in good times, how to protect themselves at the expense of their investors, they understand that.  But we’re talking about systemic and economic wide phenomena and they clearly demonstrated their lack of competence in that area.  And secondly, they have a [IB] interest, you know, they… they want to protect their own future and they’re willing to let the economy go down.  You know, repeatedly, the Secretary of the Treasury tried to get Wall Street to come together and say, “Let’s help the Lehman Brothers,” and they said, “No, we’d rather see the economy go down then to put our balance sheet at risk.”  So, their interest is clearly divergent.  Take Freddie Mac and Fannie Mae, when we did the [bail] out, it didn’t work.  We did the first [bail] out, right after that, they… Fannie Mae issued a dividend payment, putting the taxpayer even more at risk.  They were taking money out as the government is saying, “We’ll put money in.”  I mean, they’re unconscionable so there’s a clear divergence of interest so we can’t turn to them.  We can’t turn to political leaders that are dependent on money from lobbyists from Wall Street, which are particularly for the Republican Party in this coming election.  So, I think, unfortunately, that I think we have to turn to academics, people who’ve studied the matter that have… don’t have a [best of interest]… other than the [best of interest] of making sure our economy functions well and our jobs are protected, you know, and our families… our houses don’t go down but it’s that broader national interest that I think we really have to be protecting and I don’t think we can turn to Wall Street to get the answers.