New important points about the crisis, from Joseph Stiglitz
1. “The other point that I would make is about the use of the word “populism,” which is used in a number of different ways. One meaning of populism is a government that responds to the concerns of the people. Of course, that is what democracy is supposed to be about, so reformers shouldn’t worry about being labeled populist in that sense. But the other use of the word is much more negative in tone, and it describes a situation where political leaders promise things that are beyond the laws of economics.
In this crisis, I actually think of these bankers as being the populist figures in that sense. It was the bankers who tried to pretend that they could break the laws of economics. The things they were telling poor people — borrow all this money, don’t worry about your ability to replay, house prices are going to go up, you’re going to be a wealthy person — and by the way, you can share some of that wealth that you’re going to get by giving us big fees — well, that was unreality. There’s no such thing as a free lunch and the bankers were promising a free lunch both for themselves and for everybody else. So the irony in all of this is that the people who ought to be most accused of that kind of populism, that out-of-touchness with reality, are the bankers themselves.”
2. “everybody knew that there was going to be a problem with Lehman Brothers several months before it actually went under. If there really wasn’t any legal authority to deal with it, Bernanke and Paulson should have gone to Congress and said they needed it. So the fact is, this legal authority issue was just an excuse for policymakers. The bailouts of AIG and Bear Stearns involved very unusual measures. These guys were willing to bend the law, and they could have done a lot more than they did on Lehman Brothers. But they were in the business of picking winners and losers. There were a lot of discussions about how they decided who to bail out and who to not, and the sheer recklessness of the process is just inexcusable.”
Not new, but a good summary of our position on bank-economic reform:
“Taxes can make a big difference, they can help level the playing field, and there have been proposals for that. I’m not sure, though, that that’s going to be enough, and here’s why. Those who run the banks have interests that are not necessarily coincident with the banks’ shareholders and bondholders. We saw that over and over and over again. The bankers have done very well, but the shareholders and bondholders have not always done so well. So we probably need to go further than tax policy.
I argue that we need a three-pronged approach. Higher taxes and higher capital adequacy requirements to level the playing field are the first prong. The second thing we need to do is take serious structural measures like breaking them up. We should not allow banks that accept deposits to engage in proprietary trading. We shouldn’t allow them to own insurance companies, and so forth either. By forcing companies to focus on one thing rather than allowing them to conduct four different kinds of financial business, we will actually increase the efficiency of our economy. And finally, at the end, we have to make sure that they don’t undertake excessive risk….
And secondly, there are lots of forms of risk-taking. Proprietary trading is one, but for instance, the big banks are issuing these derivatives, these credit default swaps that brought down AIG. And that means if they’re issuing them, the U.S. taxpayer is underwriting them because we underwrite the commercial banks. That means we, ultimately, are bearing the risk. We shouldn’t be participating in this kind of gambling.”
On Jobs: “The first thing I would do is aid to the states. The states have balanced budget frameworks. The revenues are down by around $200 billion because of the recession. If they don’t get aid, they have to either raise taxes—which is very hard in the current environment—or cut back expenditures. And what they inevitably cut are teachers, nurses, firefighters and a whole set of crucial public services which are all the more important in an economic recession.
So the first thing is to provide states with money, and that spending goes right to the economy very quickly. You don’t have to set up new programs and it really does save jobs. I would also do one of the things that Obama is pushing now which are job credits to encourage companies to hire more workers. Focus a little bit more direct attention on jobs. We don’t know how effective these are going to be. There is some debate, but it seems to me that if we don’t try we’re not going to get anywhere. ”
Group think and peer pressure: “The normal hope at Fed and Treasury is that you will be viewed as a great economic leader because you cheered the economy on. So political leaders start acting like cheerleaders and not as economic analysts, which is dangerous.
But the deeper problem is that our public officials – the Bush administration and the Federal Reserve – were very wedded to a particular ideology that could not conceive that the markets were not efficient. They actually argued that there was no such thing as a bubble, or that even if there was, you couldn’t tell when it was happening. They actually argued that it was less expensive to clean up the mess afterward than to try to interfere with the magic of the market. It was crazy, but that made it intellectually easy to dismiss all the smart people who were talking about the housing bubble.
But of course, underneath all of that is the third reason. Lots of money was flowing to lots of people who were friends of these politicians. And no one wants to be a party pooper when so many people that they knew were making so much money. And so they were under pressure to keep the party going. But they weren’t deceiving the American people in a sense, in that they actually, I think, believed what they were saying, which is all the more worrisome.”
Archein