Tue Aug 4th, 2009 at 07:25:46 AM EST
I have been on the road for much of the past month or two, but I have a week at home, and want to post some of American economist Joseph Stiglitz's April presentation to the Hyman Minsky conference of the The Levy Economics Institute of Bard College. I did a cursory search, and it appears no one had diaried it yet here on EuroTrib.
But first, I want to point to an important piece Simon Johnson wrote on Thursday on his Baseline Scenario blog, The Case for Capital Controls, Again, in which Johnson writes:
. . . what is now being whispered about in the corridors of financial power - begin to consider ways to tighten capital controls, i.e., limit the amount of capital that can come into a country, or force investors to commit to stay in the country for longer periods of time.
OK, back to Stiglitz. YEEOOW ! he really gives it to 'em! Here's the audio file (well worth listening to as an antidote to the "green shoots, we're at the bottom" bullshit that so many people, especially in the United States, want to cling to) And here's some of what he said, lifted from the transcripts (Stiglitz begins on page 71 of this HUGE pdf file).
promoted by whataboutbob
. . . that’s probably what the Geithner plan was intended to do—to transfer money to the banking sector in ways that no one would know, because it was "Oh, we sold it at fair market value"—no, at the fair market value of the option, and without getting control. Because one of the constraints they’ve imposed on themselves is, they want to give money to the banks but don’t want us to have control over what the money does. That’s a recipe for disaster. . . . That is likely to solicit very peculiar behaviors, which we’ve already seen, where the government has provided these firms money to recapitalize and what do they do? They decapitalize by paying out dividends and bonuses.
Now, the funds were transferred in a very clever way; that is, the government provided guarantees through the FDIC. The FDIC was supposed to be insuring deposits, not this kind of activity, but if it makes a loss, who pays for it? There are two options. It’s supposed to be self-financed, but either we, the taxpayers, bail it out or it raises the deposit insurance. What it should do is honor what I call the "polluter pays" principle. The big banks have polluted our global economy with these toxic assets, and they ought to pay for the cleanup. That would mean the banks that are a source of the problem pay the higher deposit rates. But a more likely outcome is that all deposit rates will be increased; and that mean, rather than helping the small- and medium-size banks, the real sources of dynamism in our economy, we’re going to be taxing them in effect, and all for the benefit of these banks that are "too big to fail." . . .
Stiglitz then explains how the Paulson / Geithner "rescue" of the financial system has created incentives that are so perverse, that what was a zero-sum game (somebody has to bear the losses, but who gets stuck with them?), has been converted into a negative sum game, with enormous economic damage blighting entire communities, and the destruction of future economic potential.
He provides a quick summary of his evaluation of the situation. Reading it is one thing, but to get the full impact, you should listen to the audio. You can somehow hear the discomfort in the room.
There are four criteria: rekindle lending—hasn’t happened; keep the cost low—not likely; address the long-run problems—we’re not doing anything about that (in fact, the most benefit goes to the banks that did the worst); and, finally, adhere to standards of good governance and transparency—what’s actually happened in this area is really a model of what should not be done. If I were chief economist of the World Bank and a developing country had done this, I would have recommended cutting off all lending to that country. "This is a banana republic" is what we would have said in private.
Stiglitz ends with a criticism of the economics profession that is almost vicious in its directness, lucidity and intensity.
I'll lift this one little quote out of place to end with. Remember, this was back in April.
There is a continuing fiction put forward by some people that this is just a matter of expectations: if we just let the green sprouts grow and everybody feels good in the spring, house prices are going to return to where they were. If you believe that, you’re in fantasyland. The rate of decline may slow, that’s true, and that would mean we were no longer in free fall. But the fact of the matter is, we had a housing bubble, and almost surely, prices aren’t going to bounce back to where they were.