Joseph Stiglitz, winner of the 2001 Nobel Prize in Economics was recently interviewed by Amy Goodman of Democracy Now. Stiglitz 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. (If you want to see a video presentation by Stiglitz, where he speaks very frankly, check out this web-site.) Excerpts from the Democracy Now interview.
- It remains a very bad bill. It is a disappointment, but not a surprise, that the administration came up with a bill that is again based on trickle-down economics. You throw enough money at Wall Street, and some of it will trickle down to the rest of the economy. It’s like a patient suffering from giving a massive blood transfusion while there’s internal bleeding; it doesn’t do anything about the basic source of the hemorrhaging, the foreclosure problem. But that having been said, it is better than doing nothing, and hopefully after the election, we can repair the very many mistakes in it.
- But this particular way of getting it through, I have to say, really smells. They added—you know, the cost was already $700 billion. They added $150 billion of tax benefits. Some of these are really quite, quite amazing, the kinds of things that they put in: tax credit to American Samoan businesses—you mentioned a couple already in your talk—50 percent tax credit for some expenditures or maintaining railroad tracks, motor sports racetrack property given a seven-year recovery period. You can go down the list. What they did was basically old-fashioned, corrupt bribery.
- The alternative model has—is a proven model. It worked in Sweden, Norway. I don’t know why we didn’t do this better model. And there are versions that are short of nationalization. I sometimes refer to this as the Buffett model. He put in money into Goldman Sachs, got back preferred shares and warrants, so he got both protection on the downside and participation on the upside. This would have been so much better for reinvigorating our banks and for protecting American taxpayers.
- I mean, the fundamental problem, I think, that Paulson still has not understood, the banks made some very bad loans. They made loans on the basis of asset prices that were inflated by a housing bubble. That bubble has broken. Some of those loans won’t be repaid or will only be repaid in part. There’s a hole in the balance sheet, and that has to be repaired. And they have—this bill does not do it, unless it does it surreptitiously by overpaying for these assets.
- One of the interesting things about the S&L debacle twenty years ago is that it is a reminder of how much this is likely to cost the American taxpayer. You know, the administration has made a big deal that we may wind up making a profit. Well, we didn’t suffer as much loss as we might have done in the S&L, but it still wound up costing the American taxpayers some $200 billion or more. And remember, that was a relatively small fraction of America’s financial system.
- We’re now talking about not a few S&Ls; we’re talking about the core American banking system. So, if you’re thinking about that little problem costing our taxpayers back then that amount, you can imagine what this is going to cost the American taxpayer. And that was relatively well managed; this is being very badly managed.
- Already, the financial sector has been accused, and I think correctly, of engaging in non-competitive practices. And you see it in the credit card fees, which are far above competitive—equilibrium levels. That’s why they, you know, have been able to generate such profits from a very simple technology. And so, we know that they’re already engaging in anti-competitive practices. Now you have this additional concentration, the risk of this non-competitive behavior just increases all the more.
- So, we can expect the economic downturn that we’ve already been experiencing, the fact that no jobs have been created this year—we should expect that to get worse under the best of plans. And the problem is, this is not the best of plans.
- It wasn’t very long ago that the President vetoed a bill to provide healthcare, health insurance, to poor American children who otherwise would not get healthcare. Without that healthcare, they could be scarred for life. And he said—and this is a bill that costs a few billion a year—he said we could not afford it. We didn’t have the money. All the sudden, we found this $700 billion to help Wall Street. And that sort of shows you a sense of priorities, a sense of proportion.
- Our living standards in the future are going to be lower. We’re going to be sending checks on interest, and banks will repay it, on principle, abroad, money that could have gone into improving our standard of living, a whole set—you know, education, technology, infrastructure, to make our economy more competitive.
- The basic lesson of economics is there’s no such thing as a free lunch, and there’s no such thing as a free war, and there’s no such thing as a free bailout. Our resources are scarce, and we’re going to have to give up something. And the amount that we have to give up will depend, in the long run, on how well we protect taxpayers in this bailout. And that’s one of the main criticisms of the Paulson plan. It’s not as well designed as it should be to protect American taxpayers.
- The Fed engineered a bubble, a housing bubble to replace the tech bubble that it had engineered in the ’90s. The housing bubble facilitated people taking money out of their mortgages; in one year—out of their houses; in one year, there were more than $900 billion of mortgage equity withdrawals. And so, we had a consumption boom that was so strong that even though we were spending so much money abroad, we could keep the economy going. But it was so shortsighted. And it was so clear that we were living on borrowed money and borrowed time. And it was just a matter of time before, you know, the whole thing would start to unravel.
