Two weeks after Howard Dean and Karl Rove came to Portland
for the World Affairs Council of Oregon's international speaker series it was Nobel Prize-winning economist Joseph Stiglitz's
turn at the podium last night.
A skim of Stiglitz's resume reads like a list of all the schools you wanted to get into but didn't – and he's taught at all of them – and then you get to real accomplishments such as the 2001 Nobel Prize in economics. He's also been a co-author of the Intergovernmental Panel on Climate Change (which shared the 2007 Nobel Peace Prize), member of the Council of Economic Advisors from 1993-1995, and chief economist/senior vice president of the World Bank from 1997-2000. He now heads a United Nations Commission charged with reforming the global financial system.
Or as Stiglitz's introducer said last night, “He seems to be doing alright for himself.”
Fresh off the release of his latest book, Freefall: America, Free Markets, and the Sinking of the World Economy
, Stiglitz set off to answer four main questions in relation to the global financial crisis: 1) Where are we now? 2) How did we get here? 3) Why what we did didn't work as well as we had hoped. 4) And what should we do now to get out of the situation?
And the answers are:
Where are we now?
To this Stiglitz responded (to himself), “The official recession is over. I don't know if you know that, and I'm sure you don't feel it.” Reasons we don't feel it include the fact that one-sixth of workers today who would like a full-time job can't get one, more than 40 percent of those who are unemployed have been so for over six months, and certain demographics have much higher levels of unemployment, such as young African-Americans, of which about half are unemployed.
How did we get here?
Put simply, we had a bubble and the bubble burst. Americans had been living beyond their means and saving had dropped to zero percent, to which Stiglitz tacked on the aphorism, “that which is not sustainable will not be sustained.” He placed the financial sectors at the center of the problem, saying they failed at their relatively simple tasks and instead mismanaged capital and created risk. A lot of these failures stemmed from perverse incentives and the fact that “if you have bad incentives, you behave badly.”
Stiglitz reprimanded commercial banks, which are supposed to take people's money and put it in safe investments, for acting like investment banks and taking risks. “Banking should be boring,” he said.
Why what we did didn't work as well as we had hoped. And what should we do now to get out of the situation?
Questions three and four got a bit jumbled as Stiglitz continued rapidly expounding his endless supply of economic insight. The stimulus worked, but it was too small. We need another stimulus, this one more focused on creating jobs. Mortgages are still a big problem, with nearly one-quarter of them being “underwater,” meaning the homeowner owes more than the home is worth. Stiglitz said President Obama has done very little to tackle this fundamental problem.
Banks are still a big part of the problem. All the money we gave the banks hasn't restarted the crucial flow of credit. Why? Because we didn't put any conditions on what the banks did with the money. So the banks were still faced with the same unfortunate incentives and used the money to pay out dividends and bonuses instead of passing it along to those really in need. Stiglitz said that lack of a vision of what we wanted from the banks has left the financial system even worse than when the crisis began. In the last year 140 small banks – the banks that loan to small companies and help jumpstart the economy – have gone bankrupt, which has in turn allowed the big banks to get even bigger.