Last night Nation Books held a public discussion, Meltdown: The Economic Collapse and a People’s Plan for Recovery, with Joseph Stiglitz, Barbara Ehrenreich, Bill Fletcher, Jr., Jeff Madrick and Christopher Hayes. The video and audio should be posted soon, but until then I thought I’d share my rough transcription of Stiglitz’s opening remarks:
What I thought I would do in this introductory remarks is to talk a little bit about the causes of the crisis. Most of the discussion is focused on the problems of loose monetary policy, lax regulation. But I want to spend a minute trying to explain why it is that we had those loose monetary policies. The underlying problem was an insufficiency of global aggregate demand. I don’t know if you remember at the end of WWII, there was a worry that we would go back into a depression and one of the reasons for that worry was a worry that there would be insufficient demand to keep the economy growing.
Well, the reason that the monetary authority, the Fed, pursued this lax monetary policy was, in the absence of that there would have been insufficient demand. We would have had an economic downturn. The question is why was there insufficiency of global aggregate demand? And there are two reasons.
The first is the increasing inequality in most countries around the world and it’s a really striking phenomena . Actually, if look in the United States, we know that even though there has been growth in GDP, most people are poorer today than they were 8, 9 years ago. Median income has been falling and that’s true in most countries around the world. So, the reason this is a problem is that what we’ve done in effect is transfer money from people who would spend it to people who don’t spend it. And that lowers aggregate demand. In the United States we tried to get around the problem that the people at the bottom’s income was getting lower in real terms by telling them, "don’t worry you can continue to spend as if you had income." That is to say, we encouraged them to go into debt finance. And in a sense it worked pretty well for a few years but it was clearly not sustainable. In the United States, what made things worse was the war. Because what the war did is contribute to rising oil prices, rising oil prices meant that Americans were spending hundreds of billions of dollars a year to buy, to import, oil. Again, back in the seventies, when this kind of thing happened, there was a severe downturn. It didn’t happen this time. And why? Well, what happened was the Fed allowed… had low interest rates, that fed a housing bubble, that fed a consumption boom, that enabled Americans to continue to consume even though we were spending so much money on imported oil. The results of this was that our household savings rate fell to zero. Again, clearly not a sustainable policy. I sometimes jokingly say it was exactly the policy that Latin America pursued in the 1970s. It was the one part of the world that did not have major crisis after oil prices rose and evidently people studied what they did and they got all excited about this debt finance as a way of getting out of the problem of rising oil prices. Well, what they forgot was that Latin America ran into problems and they had a debt crisis in the beginning of the 1980s that led to a lost decade in Latin America.
So that’s one reason for insufficiency of global aggregate demand. The second reason is related to actually to the crisis the world faced a decade ago the global financial crisis of ‘97 and ‘98. The way that crisis was managed by the IMF and the US Treasury was a disaster . Countries lost their economic sovereignty. The IMF pushed them into pro-cyclical policies that converted downturns into recessions, recessions into depressions. If you want to get a feeling of how badly things can be mismanaged, unemployment in the central island Java of Indonesia got up to 40%. So we have a way to go yet to reach those achievements. The consequence of this bad management of the global financial crisis was that countries decided that they would never let this happen again. I’ve talked to Prime Ministers in both the countries that were affected and not affected who said, "We’ve learned the lesson of 1997". One of them said, "I was in the class of ‘97." So, the only way they had to protect themselves was to build up large reserves. And they have built up literally trillions of dollars of reserves. China’s reserves by themselves are 2 trillion dollars. Well, the reserves are good for protecting them but it means that these countries are not spending all their income. So, it contributes to a global insufficiency in aggregate demand.
One of the things that concerns me as we discuss the details of how we get out of the crisis, the stimulus, mortgages, banks – we aren’t paying attention to the some of the underlying causes that got us into the problem: bout this huge inequality and imbalances. And in fact the way we are managing the crisis right now is likely to lead to incentives for developing countries to get even more reserves, making it more difficult for us to emerge from this crisis with a robust recovery.
1. Stiglitz has written previously on how our "free trade" regime induces greater inequality.
2. In 1997 and 1998, Rubin and Summers were at Treasury and Geithner was at the IMF. For a look at Geithner’s role in the Asian financial crisis, check out this post from naked capitalism: Former Australian Prime Minister Savages Geithner’s Performance in the Asian Crisis.
3. Interesting related op-ed in the Financial Times by the same author, Paul Keating: A chance to remake the global financial system.
x-posted at oxdown