February 25, 2009 - Democracy Now!
Nobel Prize-Winning Economist Joseph Stiglitz: Obama Has
Confused Saving the Banks with Saving the Bankers
We get reaction to President Obamafs speech from Nobel economics laureate and
former World Bank chief economist, Joseph Stiglitz. Stiglitz says the Obama
administration has failed to address the structural and regulatory flaws at the
heart of the financial crisis that stand in the way of economic recovery.
Stiglitz also talks about why he thinks Obamafs strategy on Afghanistan is wrong
and that Obamafs plan to keep a gresidual forceh in Iraq will be gvery
expensive.h On health care, Stiglitz says a single-payer system is gthe only
alternative.h [includes rush transcript]
Guest:
Joseph Stiglitz, winner of the 2001 Nobel Prize
in Economics. He is a professor at Columbia University and the former chief
economist at the World Bank. He is the co-author of The Three Trillion Dollar
War: The True Cost of the Iraq Conflict.
AMY GOODMAN: To talk more about President Obamafs speech, Ifm joined
in the firehouse studio by Nobel Prize-winning economist Joseph Stiglitz,
professor at Columbia University, former chief economist at the World Bank, and
co-author of The Three Trillion Dollar War: The True Cost of the Iraq
Conflict.
Welcome to Democracy Now!
JOSEPH STIGLITZ: Nice to be here.
AMY GOODMAN: Your first assessment of the speech last night?
JOSEPH STIGLITZ: Oh, I thought it was a brilliant speech. I thought he
did an excellent job of wending his way through the fine line of trying to
say—give confidence about where wefre going, and yet the reality of our
economy—country facing a very severe economic downturn. I thought he was good in
also giving a vision and saying while wefre doing the short run, here are three
very fundamental long-run problems that we have to deal.
The critical question that many Americans are obviously concerned about is
the question of what do we do with the banks. And on that, he again was very
clear that he recognized the anger that Americans have about the way the banks
have taken our taxpayer money and misspent it, but he didnft give a clear view
of what he was going to do.
AMY GOODMAN: Letfs go to the clip last night. During his speech,
President Obama acknowledged more bailouts of the nationfs banks would be
needed, but didnft directly say, as Joe Stiglitz was saying, whether the
government would move to nationalize Citigroup and Bank of America.
PRESIDENT BARACK OBAMA: We will act with the full force of the
federal government to ensure that the major banks that Americans depend on
have enough confidence and enough money to lend even in more difficult times.
And when we learn that a major bank has serious problems, we will hold
accountable those responsible; force the necessary adjustments; provide the
support to clean up their balance sheets; and assure the continuity of a
strong, viable institution that can serve our people and our economy.
Now, I understand that on any given day Wall Street may be more comforted
by an approach that gives bank bailouts with no strings attached and that
holds nobody accountable for their reckless decisions. But such an approach
wonft solve the problem. And our goal is to quicken the day when we restart
lending to the American people and American business and end this crisis once
and for all. And I intend to hold these banks fully accountable for the
assistance they receive, and this time they will have to clearly demonstrate
how taxpayer dollars result in more lending for the American
taxpayer.
AMY GOODMAN: President Obama on Tuesday night. Joe Stiglitz, is he
holding the banks accountable?
JOSEPH STIGLITZ: Well, so far, it hasnft happened. I think the more
fundamental issues are the following. He says what we need is to get lending
restarted. If he had taken the $700 billion that we gave, levered it ten-to-one,
created some new institution guaranteed—provide partial guarantees going for,
that would have generated $7 trillion of new lending. So, if he hadnft looked at
the past, tried to bail out the banks, bail out the shareholders, bail out the
other—the bankersf retirement fund, we would have easily been able to generate
the lending that he says we need.
So the question isnft just whether we hold them accountable; the question is:
what do we get in return for the money that wefre giving them? At the end of his
speech, he spent a lot of time talking about the deficit. And yet, if we donft
do things right—and we havenft been doing them right—the deficit will be much
larger. You know, whether you spend money well in the stimulus bill or whether
youfre spending money well in the bank recapitalization, itfs important in
everything that we do that we get the bang for the buck. And the fact is, the
bank recovery bill, the way wefve been spending the money on the bank recovery,
has not been giving bang for the buck. We havenft gotten anything out.
What we got in terms of preferred shares, relative to what we gave them, a
congressional oversight panel calculated, was only sixty-seven cents on the
dollar. And the preferred shares that we got have diminished in value since
then. So we got cheated, to put it bluntly. What we donft know is that—whether
we will continue to get cheated. And thatfs really at the core of much of what
wefre talking about. Are we going to continue to get cheated?
Now, why thatfs so important is, one way of thinking about this—end of the
speech, he starts talking about a need of reforms in Social Security, put it—you
know, therefs a deficit in Social Security. Well, a few years ago, when
President Bush came to the American people and said there was a hole in Social
Security, the size of the hole was $560 billion approximately. That meant that
if we spent that amount of money, we would have guaranteed the—put on sound
financial basis our Social Security system. We wouldnft have to talk about all
these issues. We would have provided security for retirement for hundreds of
millions of Americans over the next seventy-five years. Thatfs less money than
we spent in the bailouts of the banks, for which we have not been able to see
any outcome. So itfs that kind of tradeoff that seems to me that we ought to
begin to talk about.
AMY GOODMAN: So, you say Obama, too, has confused saving the banks
with saving the bankers.
JOSEPH STIGLITZ: Exactly.
AMY GOODMAN: Should they all have been fired?
JOSEPH STIGLITZ: Well, I think one has to look at it on a bank-by-bank
basis. Clearly, the banks that have not been managed very well, we need to not
only fire them, we have to change their incentive structure. And itfs not just
the level of pay; itfs the form of the pay. Their incentive structures encourage
excessive risk taking, shortsighted behavior. And in a way, itfs a vindication
of economic theory. They behaved in the irresponsible way that their incentive
structures would have led them to behave.
AMY GOODMAN: Explain that.
JOSEPH STIGLITZ: Well, if you get an incentive structure where you say
you get huge pay if things go well, but you donft pay any consequences if things
go badly, and youfre going to look at it only in terms of the profits that you
make this year, not the losses that you make next year and the year after, then
of course youfre going to try to get a gamble, because if you gamble and you
win, you walk off with the money; if you lose, somebody else picks up the
losses.
So what happened was, the banks gambled. They gambled very big. They had big
profits for four years. But in the fifth year, the losses were greater than all
the profits that they had in the first four years. But meanwhile, they walk off
with the bonuses based on the four-year performance, and then, the fifth year,
they donft—I mean, it was quite remarkable, they didnft even—they even got big
bonuses for the record losses. Then thatfs what, of course, has gotten Americans
angry, so that the bonuses were described as incentive pay. But that was all a
charade.
But the basic thing is, you know, our bankers are—many of them, not all of
them—are, you might say, ethically challenged. But even were not they ethically
challenged, the fact is they had incentive structures that led them to behave in
the way they did.
AMY GOODMAN: Should the banks be nationalized?
JOSEPH STIGLITZ: Many of the banks clearly should be put into, you
might say, conservatorship. Americans donft like to use the word
gnationalization.h We do it all the time. We do it every week.
AMY GOODMAN: Explain.
JOSEPH STIGLITZ: Well, if banks donft have enough capital so that they
can meet the commitments theyfve made to the depositors, at the end of every
week the FDIC looks at the balance sheet, and it says, gYou donft have enough
capital. Youfre not allowed to continue.h And then what they do is they either
find some other bank to take it over and fill in the hole, or they take it into
government control—it sounds terrible, to take it into government control—and
then sell it.
And thatfs what other countries have done when they faced this kind of
problem—the countries that have done it well. One of the important lessons is
this is the kind of thing can be done well, could be done badly. And the
countries that have done badly have wound up paying to restructure the bank 20,
30, 40 percent, even 50 percent of GDP. Wefre on our way to that kind of
debacle. But that shows you how bad things can be, how costly it can be, if you
donft do it well.
AMY GOODMAN: Wefre talking to Joe Stiglitz. He won the Nobel Prize in
Economics in 2001, professor at Columbia University, former chief economist at
the World Bank. Wefll be back with him in a minute.
[break]
AMY GOODMAN: Joe Stiglitz, our guest, hefs the Nobel Prize-winning
economist from Columbia University and co-author of The Three Trillion Dollar
War: The True Cost of the Iraq Conflict.
So, youfre saying small and big banks are being treated differently.
JOSEPH STIGLITZ: Very much so. The small banks were shut down. The big
banks—Citibank, Bank of America—wefre giving huge bailouts.
Most interesting case is actually AIG, not even a bank, and we poured in $150
billion. Originally, they said they only needed $20 billion. And then, every few
hours, every few days, the losses got bigger, [inaudible] another $60 billion.
Now, that fact, the fact that we keep getting bad news and have to pour money
in, should make us really worried. The question is, why did we bail out AIG?
What they said is, the reason we bailed it out is if we didnft bail it out,
there would be consequences somewhere else. They didnft tell us where.
It would make much more sense if we looked at where the consequences were and
deal with the problems as they turn out. Just for instance, some of the, quote,
ginsurance policy derivativesh were not in the United States. The people that
would have problems may be gamblers, may be other institutions abroad. Do
American taxpayers want to be bailing out institutions abroad? Thatfs a question
we ought to be debating. There may be pension funds that may be hurt. Well, some
of the pension funds may be able to withstand it; other pension funds will need
to have assistance. But letfs get the money going to where we think it ought to
go, rather than this trickle-down approach that wefve been using with AIG.
AMY GOODMAN: Very quickly, which countries do you think did things
well, and which didnft?
JOSEPH STIGLITZ: Well, Sweden and Norway did things very well back in
the end of the f80s, beginning of the f90s.
The UK, I think, has been doing it much better than the United States. Its
problems are bigger— we have to realize that—because its banking sector was a
more important part of the economy, and one of the banks actually had
liabilities greater than the GDP of the UK. So itfs going to be facing a very
difficult time. But the fact of the matter is, the way Gordon Brown did it,
replacing the heads of the banks—it was real sense of accountability there.
Government got control and shares commensurate with the money that it was paying
in—it wasnft a giveaway—and now trying to make sure that they start lending,
forward-looking. So itfs clearly—they have a much clearer concept of what is
needed.
AMY GOODMAN: Why is Obama saving these bankers?
JOSEPH STIGLITZ: Well, we could all guess about the politics. We know
one of the problems about American politics is the role of campaign
contributions, and thatfs plagued every one of our major problems. Under the
Bush administration, we couldnft deal with a large number problems, like the oil
industry, like the pharmaceutical, the healthcare, because of the influence of
campaign contributions. Now, my view is, one of the problems is that whether
itfs because of that or not, it lends an aura of suspicion. The fact that there
was so much campaign contributions from the financial sector at least raises the
concern.
Now, there is one other legitimate concern, that Wall Street has done a very
good job of fear mongering. They say, gIf you donft save us, the whole system
will go down.h But, you know, when these banks that I talked about before, when
they go down, therefs not even a ripple. The fact is, you change ownership. It
happens on airlines all the time. An airline goes bankrupt, a new ownership,
financial reorganization—not a big deal. What theyfve succeeded in doing is
instilling a sense of fear, so that itfs a kind of paralysis that hangs over
what wefre doing. And you could understand a politician. Hefs been told if you
do one thing, the whole system—the sky is falling, itfs going to fall. That
induces political leaders to try to do the smallest incremental step, and thatfs
what got Japan in trouble.
AMY GOODMAN: And your thoughts on Geithner and Summers? Can they
handle this? What do you think of them as the economics team?
JOSEPH STIGLITZ: Well, the question is, are they willing to take the
bold measures that are necessary? Everybody keeps saying we need to take bold
measures, inaction is not a possibility. Thatfs not the issue on the table.
Action will be taken. The question is, which action? Is the action pouring more
money into the banks without any effect on lending, increasing the deficit,
which the President talked about, or the actions which could be taken, starting
on new banks, looking forward rather than looking to the past, significant
financial restructuring?
Are we going to bail out the shareholders, bail out the bankers, rather than
focusing on saving the systemically important parts of these institutions? There
are some important parts of these institutions that wefll have to save. The
question is, are you going to go do it like with a bludgeon, throw money at it,
or are you going to try to do it more surgically and save the parts that need to
be saved? And one of the things that went wrong is when we went—let Lehman
Brothers go. It caused this enormous trauma. And thatfs increased the fear
about—but thatfs an example of doing things wrong. We didnft ask the question.
There was a systemically important part of Lehman Brothers.
AMY GOODMAN: Which was?
JOSEPH STIGLITZ: Which were the commercial paper that was part of the
money market funds that were—people were using like banks, like part of our
basic payment mechanism. We could have saved that part and let the gambling part
of Lehman Brothers, which is not part of the payment mechanism, go down. And
because we took this blunt approach, we failed. And what the financial markets
are doing are saying, gYou have to save everything, if youfre going to save
anything.h And thatfs just wrong.
AMY GOODMAN: Tomorrow, President Obama is going to announce plans to
cut the deficit in half. Do you think thatfs the right way to go?
JOSEPH STIGLITZ: What we have to remember is we are in for almost
like—most likely a long and extended downturn. Now, we will eventually recover.
Thatfs not a question. But in 2011, 2012, will we be in a sharp recovery or in a
more slow recovery?
One of the lessons from Japan was that in 1997, when they were in the
beginning of their recovery, they increased taxes because they wanted to get rid
of their deficit, and the economy sank down back into a downturn.
The way to look at it is the following. Right now, in 2009, 2010, wefre
talking about, per year, something like a stimulus bill of $350 billion per
year. To cut the deficit in half, with a deficit as we go into—without the
stimulus is one-and-a-half trillion dollars, so wefre talking about pulling out
$600, $700, $750 billion. Thatfs the reverse of an expenditure, taking out the
stimulus and cutting back expenditures by another $600 billion—wefre talking
about a turnaround of a trillion dollars. Do you really believe that by 2010, by
2011, 2012, our economic recovery will be so strong that it can withstand that
kind of taking out of expenditure? I donft think so. And so, if you went ahead
and did that, we will go back into a downturn.
AMY GOODMAN: Joe Stiglitz, you co-wrote The Three Trillion Dollar
War: The True Cost of the Iraq Conflict. Talk about the effect of war on the
economic crisis. And now wefre not only talking about Iraq. But your thoughts on
increasing the number of troops, intensifying the war in Afghanistan?
JOSEPH STIGLITZ: Well, first, let me say, one of—the President did
have two things that I really welcome. And several of the suggestions that we
made in our book, he has adopted. For instance, in the past, under the Bush
administration, the war was totally funded by—or almost totally funded by
emergency appropriations. It was as if every year was a surprise. And he said
hefs going to put that on the books so that we can evaluate it, make sure their
money is going in the best possible way.
A second thing in our book that was, you know, really—was really, I found,
very moving was the way we treat our veterans is terrible. And he said, you
know, they fought for us; we have to fully fund the Veterans Administration. So
those were really important moves in the right direction.
But on the other side, the move into Afghanistan is going to be very
expensive. Things are not going very well. Our European—those who—NATO partners
are getting disillusioned with the war. I talked to a lot of the people in
Europe, and they really feel this is a quagmire, wefre going into another
quagmire. And one of the things that we do talk about in our book is that if you
keep a residual force in Iraq, itfs going to be very expensive. Thatfs the
experience that Britain has had. Theyfve kept a relatively few troops, and the
result of that is the savings that they had hoped werenft materialized. So that
goes back to the part that he talked about at the end of his speech: the
deficit. If youfre going to be spending all this money in Afghanistan and in
Iraq, that deficit is just going to be that much greater.
AMY GOODMAN: So you think Obama is wrong on Afghanistan?
JOSEPH STIGLITZ: I think so.
AMY GOODMAN: Have you told him? Have you been talking to him?
JOSEPH STIGLITZ: Not on that issue.
AMY GOODMAN: Youfve been talking to him, though?
JOSEPH STIGLITZ: During the primary and the period afterwards in some
discussions about what to do with the banks. There were discussions. The—
AMY GOODMAN: Meaning you talked to him—
JOSEPH STIGLITZ: Yeah.
AMY GOODMAN: —on the telephone.
JOSEPH STIGLITZ: Yeah.
AMY GOODMAN: I wanted to get your response—after President Obama
spoke, the Louisiana Governor Bobby Jindal gave the Republican Partyfs official
response. He blasted President Obamafs stimulus bill as an irresponsible piece
of legislation.
GOV. BOBBY JINDAL: Democratic leaders in Washington, they place
their hope in the federal government. We place our hope in you, the American
people. In the end, it comes down to an honest and fundamental disagreement
about the proper role of government. We oppose the national Democratic view
that says the way to strengthen our country is to increase dependence on
government. We believe the way to strengthen our country is to restrain
spending in Washington, to empower individuals and small businesses to grow
our economy and to create jobs.
AMY GOODMAN: Louisiana Governor Jindal. Your response, Joe Stiglitz?
JOSEPH STIGLITZ: I wish he had taken an economics course. The fact is
that when the economy is weak, as it is, you need to stimulate aggregate demand.
If you donft do that, the economy gets weaker. And whatfs good about most of
Obamafs plan is that itfs creating assets. So, while the liabilities go up—wefre
going to have to borrow—we also are creating assets. If we had spent a few
billion dollars under the beginning of the Bush administration on the levees in
New Orleans, we would not have had to spend so much money in the cleanup, in
dealing with the devastation that it brought. That would have been money that
would have had an enormous return. $5 billion would have saved $150 billion. And
so, thatfs an example where there are certain kinds of investments—investments
in technology, investments in people—that the private sector canft do and the
government can do in ways that give us a very high return.
AMY GOODMAN: Joe Stiglitz, very briefly, the whole issue of
globalization—wefre in the tenth anniversary of the mass protests in Seattle,
the Battle of Seattle. What about the questions raised in corporate-led
globalization?
JOSEPH STIGLITZ: Well, I think two very important issues. One of them
is the model that was behind much of the impetus for that globalization was a
model based on free unfettered markets. And we know that model, deregulation,
has failed. That was the kind of thinking that led into the problems the United
States is in today.
The second point is that while we talk about free and open markets, what the
United States has been doing has destroyed a level playing field and will have
profound implications for the evolution of globalization going forward.
AMY GOODMAN: And for developing countries?
JOSEPH STIGLITZ: And for developing countries, itfs having a
devastating effect. I mean, just a couple days ago, the other American banks
were complaining about the huge subsidies that were given to Citibank. They say,
gHow can we compete when the government is subsidizing Citibank to that extent?h
Now, if you think these other American banks that have gotten massive subsidies
are complaining, you can imagine the kind of feelings that people have in
developing countries that say, gWe canft afford those mega-subsidies. How can we
compete against Washington being able to write a check any time anything goes
wrong?h
AMY GOODMAN: And healthcare? Hefs called for universal healthcare, but
he does not call for single-payer healthcare.
JOSEPH STIGLITZ: I think that there are some fundamental problems in
the efficiency of our healthcare system. And what wefve seen is that the private
healthcare insurers do not know how to deliver an efficient way.
AMY GOODMAN: Do you support single-payer healthcare?
JOSEPH STIGLITZ: I think Ifve reluctantly come to the view that itfs
the only alternative. You know, wefve tried a lot of other things. And wefve
been—you know, I was in the Clinton administration, and we debated a lot of
alternatives, and Ifve watched things as theyfve emerged and, you know, evolved
over the last twelve, sixteen years, and I think therefs a growing consensus
that the private market exclusion is not going to work.
AMY GOODMAN: Joe Stiglitz, I want to thank you for being with us, the
Nobel Prize-winning economist, professor at Columbia University, co-author of
The Three Trillion Dollar War: The True Cost of the Iraq Conflict.