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Stiglitz: We're turning Japanese

Joseph Stiglitz | Stiglitz: We're turning Japanese Ian Fraser

There was some good news for US taxpayers from the US Treasury last Tuesday. They were told that the cost of bailing-out US banks had been much lower than expected.

The $700bn troubled assets relief program (TARP) has cost a mere $50bn, down from an estimated $341bn in August 2009. And the cost may fall to $30bn if the government is successful in selling its stake in insurer AIG.

Treasury secretary Tim Geithner trumpeted the fact TARP had reduced the severity of the crisis and stabilized the financial system telling Daniel Gross that it “worked only because combined with the creativity and the force of the Fed.”

The economist Joseph Stiglitz begs to differ. Writing in Freefall: America, Free Markets, and the Sinking of the World Economy Stiglitz described the bank rescue plan as “among the most costly mistakes of any government at any time”.

At an event to launch the paperback version of Freefall, Stiglitz pointed out that for a fraction of TARP's cost the US government could have created a whole new set of financial institutions, unencumbered by past wrongheadedness - and willing to lend.

Speaking at an event at Columbia University in New York on October 5, Stliglitz laid into the Federal Reserve and the European Central Bank, accusing them of throwing the world into "chaos" by unleashing a "flood of liquidity". He said this had had little impact on domestic economies but had caused mayhem in the forex markets.

In Freefall’s new afterword Stiglitz said the biggest challenge facing American policymakers and economists is getting used to the “new normal”. This includes

"higher unemployment rates, lower growth and lower levels of public services in the advanced industrial countries. Prosperity has been replaced by a Japanese-style malaise, with no end in sight. But at least in Japan's "lost decade," in spite of low growth, unemployment remained low and social cohesion remained high ….

"In Europe and America, some economists are talking about a persistent unemployment rate of 7.5% … The financial crisis has indeed done long-term damage to our economy, from which we will only gradually recover."

Joseph Stiglitz, who won the Nobel prize in 2001, said proponents of austerity measures, such as UK prime minister David Cameron, are naive, warning they could push their economies into a double-dip recession. He said countries are not like households.

"When governments cut spending, growth slows, unemployment increases, and income – and tax revenue – declines."

Stiglitz said there was a “moment when the whole world was Keynesian, and the misguided idea that unfettered and unregulated markets were stable and efficient had been discredited” at the G20 London Summit in April 2009.

However, he regrets that this global unity had splintered and fragmented since the Greek sovereign debt crisis in March. Optimism had been replaced by “a new mood of despair."

On a more positive note, the Columbia University professor said inflation is unlikely to be a threat as long as unemployment remains high. He said the low yields on US government bonds suggest that the market is not too worried about inflation, even over the long term.

The most disturbing passage of Freefall's new afterword probably concerns Europe and the euro. Stiglitz reiterated his stance that the single European currency was a mistake, given that it forces peripheral countries into a sort of straitjacket. But he went on to suggest the single European currency may now be doomed.

He said Europe may be failing the test presented by the crisis and that Spain may be “entering the kind of death spiral” that afflicted Argentina just a decade ago. He believes the only solutions are for Germany to leave the eurozone or for the zone to be split into two sub-regions.

Remarkably these gloomy words about Europe's future, written in the paperback's afterword and serialized in the Daily Telegraph, are seen as having prompted a fall in the euro’s value against the dollar on October 5. That's the power of economists for you!

Further reading on the trouble with austerity measures and the future of the euro:

Tags: European Central Bank , European Monetary Union , G20 , Greece , Joseph Stiglitz , Spain , US
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