May 15, 2009

Stiglitz Is Coming to Town

Update: A reader recommends a March piece by Paul Krugman in which he blasts the bank bailout plan. "But Treasury is still clinging to the idea that this is just a panic attack, and that all it needs to do is calm the markets by buying up a bunch of troubled assets. Actually, that’s not quite it: the Obama administration has apparently made the judgment that there would be a public outcry if it announced a straightforward plan along these lines, so it has produced what Yves Smith calls 'a lot of bells and whistles to finesse the fact that the government will wind up paying well above market ... .'"

Next Tuesday's (May 19) Joint Economic Committee (JEC) hearing will hear testimony by Nobel Laureate economist Joseph Stiglitz.

Stiglitz is widely admired for his book (co-authored with Linda J. Bilmes), The Three Trillion Dollar War: The True Cost of the Iraq Conflict, putting a price tag on the obscene Bush-Cheney-Rice lie that continues to kill to this day.

That's the thing about Nobel Laureates. They often feel free and obliged to tell the hard, unvarnished truth.

To give you an idea of what Stiglitz will say on the economy, consider his commentary in The Spring of the Zombies, excerpted below after this political aside.
No one envies the Obama administration's task to revitalize after 20 years of neo-liberal/neo-conservative globalization, offshoring of jobs, and facilitation of financial speculators.

But Obama's resort to Bushian secrecy on matters ranging from the bank bailout plan to photos of American torture victims does not inspire confidence, much less reassurance that our president is on the same team as we.

An unprecedented number of Americans (myself included) worked to get Obama into the White House; and America still suffers from eight years of a genuinely hostile force in the White House.

We expect better from Obama. In so many words: You don't lie to a man who just got out of the can.

We are either in this together or we are not

Obama's refusal to provide the pubic with details on the mysterious creation of Zombie banks and the censorship of the black art of American torture makes everyone wonder about the nature of the man in charge.

The audacity of opacity is not the message that any administration should be sending to American citizens especially now. It's a tremendous mistake.
From Stiglitz:

(E)xamine the fundamentals: in America, real estate prices continue to fall, millions of homes are underwater, with the value of mortgages exceeding the market price, and unemployment is increasing, with hundreds of thousands reaching the end of their 39 weeks of unemployment insurance. States are being forced to lay off workers as tax revenues plummet.

The banking system has just been tested to see if it is adequately capitalized – a ‘stress’ test that involved no stress – and some couldn’t pass muster. But, rather than welcoming the opportunity to recapitalize, perhaps with government help, the banks seem to prefer a Japanese-style response: we will muddle through.

‘Zombie’ banks – dead but still walking among the living – are, in Ed Kane’s immortal words, ‘gambling on resurrection.’ Repeating the Savings & Loan debacle of the 1980’s, the banks are using bad accounting (they were allowed, for example, to keep impaired assets on their books without writing them down, on the fiction that they might be held to maturity and somehow turn healthy). Worse still, they are being allowed to borrow cheaply from the United States Federal Reserve, on the basis of poor collateral, and simultaneously to take risky positions. ...

In earlier crises, as in East Asia a decade ago, recovery was quick, because the affected countries could export their way to renewed prosperity. But this is a synchronous global downturn. America and Europe can’t export their way out of their doldrums.

Fixing the financial system is necessary, but not sufficient, for recovery. America’s strategy for fixing its financial system is costly and unfair, for it is rewarding the people who caused the economic mess. But there is an alternative that essentially means playing by the rules of a normal market economy: a debt-for-equity swap.

With such a swap, confidence could be restored to the banking system, and lending could be reignited with little or no cost to the taxpayer. It’s neither particularly complicated nor novel. Bondholders obviously don’t like it – they would rather get a gift from the government. But there are far better uses of the public’s money, including another round of stimulus.

Every downturn comes to an end. The question is how long and deep this downturn will be. In spite of some spring sprouts, we should prepare for another dark winter: it’s time for Plan B in bank restructuring and another dose of Keynesian medicine.

Joseph E. Stiglitz, Professor of Economics at Columbia University, chairs a Commission of Experts, appointed by the President of the UN General Assembly, on reforms of the international monetary and financial system. A new global reserve currency system is discussed in his 2006 book, Making Globalization Work.

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