Nobel-Winning Economist Assigns Blame for Financial Crisis
Joseph Stiglitz of Columbia University delivered the Arnold C. Harberger Distinguished Lecture, presented annually by the UCLA Burkle Center for International Relations, on April 21 to a standing-room-only audience at the Anderson School's Korn Convocation Hall.
By Judy Lin for UCLA Today
Banks that "got out of the lending business and into the gambling business," the escalating inequality between America’s rich and poor, and outdated economic models formed the tangled roots of the nation’s 2007 financial crisis, said Columbia University economist Joseph Stiglitz, Nobel laureate, former World Bank senior vice president and economic adviser to President Clinton.
In an engaging, plain-talking style, Stiglitz delivered the Arnold C. Harberger Distinguished Lecture, presented annually by the UCLA Burkle Center for International Relations, on April 21 to a standing-room-only audience at the Anderson School's Korn Convocation Hall.
Drawing on his bestselling book, "Freefall: America, Free Markets, and the Sinking of the World Economy" (2010, WW Norton and Penguin/Allen Lane), Stiglitz discussed the sluggish economy as well as potential solutions.
"It’s been four years since the break of the (real estate) bubble," Stiglitz said. With federal economic stimulus funds and other efforts, "We’ve been pulled back from the brink, but we’re still in trouble."
Among the indicators: Most Americans are worse off now than they were 12 years ago, with their average income lower today than it was in 1999. That said, the richest of the rich, 1 percent of the population, is pulling in a full 25 percent of the nation’s income — while tending not to spend a lot of it, further bogging down the economy.
High unemployment persists. In addition to the "official count" of unemployed Americans (8.8 percent unemployment nationwide as of March), Stiglitz pointed to an unreported statistic: One out of six Americans have been unemployed for more than two years and have given up on looking for work.
In a rueful aside, Stiglitz said that "some people say [this group] isn’t unemployed, that they are choosing not to work" to have more vacation time. "When I ask [these critics] why these people are unhappy, they say it’s not a problem of unemployment but a problem for psychiatry."
Delusion, he said, has played a part in the problem all along — beginning with the pre-collapse bubble of inflated housing prices.
"It was all a dream, it wasn’t reality," Stiglitz said. "The value of houses was artificial." And yet, in the year preceding the meltdown, Americans spent $18 trillion taken from their homes’ presumed equity.
Today, one of every four mortgages is "underwater," with borrowers owing more to the bank than their home’s appraised value. Nearly 7 million Americans have lost their homes to foreclosure, and Stiglitz said he expects another 2 million home losses this year and continuing in the next two or three years. In defense of minority borrowers, he noted that data show that loan default rates among minorities are no higher than among non-minorities. "The problem began in the private sector," he said. "We believed in the private sector — and that was a mistake."
That private sector — banks and other financial institutions — exploited the poor through predatory lending and gambled with derivatives to maximize profits, meanwhile making political investments that ensured that government regulators would be appointed "who didn’t believe in regulation."
The feds must take blame for not only failing to oversee the financial sector but for providing billion-dollar bailouts with no strings attached. "The banks used the bailout money to pay bonuses, not reinvest," Stiglitz said. "We decided to socialize the losses while privatizing the gains."
The government’s economic stimulus plan, however, was a step in the right direction, he said. The American Recovery and Reinvestment Act of 2009 has pumped $787 billion back into the economy. But this stimulus, now coming to an end, hasn’t been enough, said Stiglitz, who expressed deep concern over the current debate on Capitol Hill about deficit reduction — especially about "austerity" spending cutbacks. "Austerity has never worked. It just slows the economy down more."
The best way to fix the deficit, Stiglitz said, is to "put Americans back to work." This entails restructuring the nation’s spending, redirecting funds from, for example, the military to education, technology and infrastructure. "We need to support teachers, not war. If we spend our money well, the deficit can be reduced in three or four years."
Stiglitz also pointed to his own profession as culpable in the crisis.
"Part of the blame is on the economics profession," he said, "or, as I like to put it, on other economists. There are fallacies in economic thought being taught in universities around the world."
But with the crisis has come proverbial opportunity. "This is an exciting time … because we are rethinking economics," Stiglitz said.
Published: Monday, April 25, 2011