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From: [EMAIL PROTECTED]
Date: September 16, 2008 5:27:05 PM PDT
To: [EMAIL PROTECTED]
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Subject: This Is to Capitalism What the Fall of the Berlin Wall Was to
Communism
The Fall of Wall Street Is to Market Fundamentalism What the Fall of
the Berlin Wall Was to Communism
Nathan Gardels
Posted September 16, 2008 | 04:52 PM (EST)
http://www.huffingtonpost.com/nathan-gardels/stiglitz-the-fall-of-wall_b_126911.html
Joseph Stiglitz was awarded the Nobel Prize for Economics in 2001. I
spoke with him Tuesday about the Wall Street meltdown.
Nathan Gardels: Barack Obama has said the Wall Street meltdown is the
greatest financial crisis since the Great Depression. John McCain says
the economy is threatened, but fundamentally strong. Which is it?
Joseph Stiglitz: Obama is much closer to the mark. Yes, America has
talented people, great universities and a good hi-tech sector. But the
financial markets have played a very important role, accounting for 30
percent of corporate profits in the last few years.
Those who run the financial markets have garnered those profits on the
argument they were helping manage risk and efficiently allocating
capital, which is why, they said, they "deserved" those high returns.
That's been shown to be not true. They've managed it all badly. Now it
has come back to bite them and now the rest of the economy will pay as
the wheels of commerce slow because of the credit crunch. No modern
economy can function well without a vibrant financial sector.
So, Obama's diagnosis that our financial sector is in desperate shape
is correct. And if it is in desperate shape, that means our economy is
in desperate shape.
Even if we weren't looking at the financial turmoil, but at the level
of household, national and federal debt there is a major problem. We
are drowning. If we look at inequality, which is the greatest since
the Great Depression, there is a major problem. If we look at
stagnating wages, there is a major problem.
Most of the economic growth we've had in the past five years was based
on the housing bubble, which has now burst. And the fruits of that
growth have not been shared widely. In short, the fundamentals are not
strong.
Gardels: What ought to be the policy response to the Wall Street
meltdown?
Stiglitz: Clearly, we need not only re-regulation, but a redesign of
the regulatory system. During his reign as head of the Federal Reserve
in which this mortgage and financial bubble grew, Alan Greenspan had
plenty of instruments to use to curb it, but failed. He was chosen by
Ronald Reagan, after all, because of his anti-regulation attitudes.
Paul Volcker, the previous Fed Chairman known for keeping inflation
under control, was fired because the Reagan administration didn't
believe he was an adequate de-regulator. Our country has thus suffered
from the consequences of choosing as regulator-in-chief of the economy
someone who didn't believe in regulation.
So, first, to correct the problem we need political leaders and
policymakers who believe in regulation. Beyond that, we need to put in
place a new system that can cope with the expansion of finance and
financial instruments beyond traditional banks.
For example, we need to regulate incentives. Bonuses need to be paid
on multiyear performance instead of one year, which is an
encouragement to gambling. Stock options encourage dishonest
accounting and need to be curbed. In short, we built incentives for
bad behavior in the system, and we got it.
We also need "speed bumps." Every financial crisis historically has
been associated with the very rapid expansion of particular kinds of
assets, from tulips to mortgages. If you dampen that, you can stop the
bubbles from getting out of control. The world wouldn't disappear if
we expanded mortgages at 10 percent a year instead of 25 percent a
year. We know the pattern so well we ought to be able to do something
to curtail it.
Above all, we need a financial product safety commission just like we
have for consumer goods. The financiers were inventing products not
intended to manage risk but to create risk.
Of course, I believe strongly in greater transparency. Yet, in terms
of regulatory standards, these products were transparent in a
technical sense. They were just so complex no one could understand
them. If every provision in these contracts were made public, it
wouldn't have added any useful information about the risk to any
mortal person.
Too much information is no information. In this sense, those calling
for more disclosure as the solution to the problem don't understand
information.
If you are buying a product, you want to know the risk, pure and
simple. That is the issue.
Gardels: The mortgage-backed securities behind the meltdown are held
across the world by banks or sovereign funds in China, Japan, Europe
and the Gulf. What impact will this crisis have on them?
Stiglitz: That is true. The losses of European financial institutions
over sub-prime mortgages have been greater than in the U.S.
The fact that the U.S. diversified these mortgage-backed securities to
holders around the world -- thanks to globalization of markets -- has
actually softened the impact on the U.S. itself. If we hadn't spread
the risk around the whole world, the downturn in the U.S. would be
much worse.
One thing that is now being understood as a result of this crisis is
the information asymmetries of globalization. In Europe, for example,
it was little understood that U.S. mortgages are non-recourse
mortgages -- if the value of the house becomes less than the value of
the mortgage, you can turn the key over to the bank and walk away. In
Europe, the house is collateral, but the borrower remains on the hook
for the amount he borrowed no matter what.
This is a danger of globalization: Knowledge is local because you know
far more about your own society than others.
Gardels: What, then, is the ultimate impact of the Wall Street
meltdown of market-driven globalization?
Stiglitz: The globalization agenda has been closely linked with the
market fundamentalists -- the ideology of free markets and financial
liberalization. In this crisis, we see the most market-oriented
institutions in the most market-oriented economy failing and running
to the government for help. Everyone in the world will say now that
this is the end of market fundamentalism.
In this sense, the fall of Wall Street is for market fundamentalism
what the fall of the Berlin Wall was for communism -- it tells the
world that this way of economic organization turns out not to be
sustainable. In the end, everyone says, that model doesn't work. This
moment is a marker that the claims of financial market liberalization
were bogus.
The hypocrisy between the way the U.S. Treasury, the IMF and the World
Bank handled the Asian crisis of 1997 and the way this is being
handled has heightened this intellectual reaction. The Asians now say,
"Wait a minute, you told us to imitate you in the U.S. You are the
model. Had we followed your example we would be in the same mess. You
may be able to afford it. We can't".
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