by Frank Schnittger
Thu Oct 15th, 2009 at 10:55:26 AM EST
David McWilliams, one of the best Irish economists has a good piece on an interview he did with an old acquaintance in Ireland recently - Joe Stiglitz, winner of the Nobel Prize in economics, former chief economist of the World Bank, and the head of former US president Bill Clinton's Council of Economic Advisers who presided over the US's sustainable boom of the 1990s. It's worth reading in full, but here is an extract.
Nama is highway robbery | David McWilliams
When asked whether he would implement a Nama-style bailout for the banks, he responded: ``No, this is the kind of highway robbery which we see happening all over the world, with guns pointing at the heads of the political leaders and the bankers claiming the sky will fall down and the economy will be devastated unless they get this money."
He went on to compare the employment of mass fear as the single justification for bank bailouts with the same weapon of mass fear that was deployed by President George W Bush after 9/11.
``It was invoked to justify anything the president wanted to do, such as the Iraq invasion," Stiglitz said. ``Well, the bankers now use 15/9 [September 15, 2008 was the day Lehman Bros went bankrupt] as the new weapon of choice to force politicians into the huge bailouts, which will bring us enormous debts on our balance sheets with no real assets on the other side. But the bankers will be saved. When we gave them the money, the bankers said `don't worry, you will get your money back', but no one believes that now."
Nama is highway robbery | David McWilliams
When asked if letting the banks go would be the end of the world, which is the default position of Ireland’s current government and banking and economic establishment, Stiglitz laughed.
‘‘This is nonsense,” he said. ‘‘Countries which allow banks to go under by following the ordinary rules of capitalism have done fine. The US has let 100 banks go this year alone, as did Sweden and Norway in their crises. In the US, it’s just the big, politically-powerful banks that have not been allowed to go down, for political reasons.
‘‘The important thing to remember about financial markets is that they are forward-looking, but what they do remember is the size of your national debt.
If you spend money in bailing out banks without taking all the equity, you will end up having a huge national debt, a liability with no assets to show for it. Now that will scare off investors in the future.
“[In Ireland], this bank bailout is a simple transfer from taxpayers to bondholders, and it will saddle generations to come. The only thing that might give you solace is that, as chief economist of the World Bank, we see this type of thing happening in banana republics all over the world. Whenever a banking crisis happens, the financial sector uses the turmoil as a mechanism to transfer wealth from the general population to themselves. I’ve been very disappointed to see that it has happened, not only in banana republics, but in advanced industrialised countries.”
And how did our esteemed Finance Minister, Brian Lenhan respond?
The Irish Economy » Blog Archive » Lenihan on Stiglitz
The Minister for Finance has responded to Stiglitz's criticisms. According to Bloomberg:
Lenihan pointed to the U.S. as an example of a rescue package that was attacked before succeeding.
"I simply do not accept his analysis," Lenihan said. "As far as Professor Stiglitz is concerned, he made the same criticism of the U.S. bank package, which is now proved to be a tremendous success."
Of course, the US TARP bank package, which Minister Lenihan is referring to as a tremendous success, started life like NAMA as a plan to overpay for troubled assets but was changed to become a plan in which the US government made equity investments in the leading financial institutions.
Stiglitz has argued that the terms of the TARP equity investments were insufficiently generous to the US taxpayer--see here for a report from TARP's Congressional Oversight Panel which endorses this viewpoint. It would be misleading, however, to characterise the Stiglitz's criticisms of TARP as being directly related to his views on NAMA. On this issue, see here for an interview with Joe from Feburary in which, among other things, he discusses proposals then being floated for the US government to purchase bad assets--he characterises Paulson's orginal TARP plan as "cash for trash".
I find it really worrying with our Finance Minister can so easily dismiss the comments of such a well qualified and experienced economist as Joe Stiglitz. Just who's advice is he taking and where is it coming from? The disconnect with reality only seems to be getting worse.