Capitalist Foolsby Joseph Stiglitz

Sarah TAQUIApril 2013

Joseph Stiglitz

• Nobel Memorial Prize in Economic Sciences (2001)

• The John Bates Clark Medal (1979). • A former senior vice president and

chief economist of the World Bank. • A former member, and Chairman of

the Council of Economic Advisers. • Critical view of: The management of globalization, Free-market economists, Some international institutions.

Five key mistakes—under Reagan, Clinton, and Bush II

No. 1: Firing the Chairman

• Paul Volcker was appointed chairman of the board of governors for the Federal Reserve System in August 1979 by President Jimmy Carter and reappointed in 1983 by President Ronald Reagan, but he was removed by Reagan in 1987.

• The Fed board led by Volcker is widely credited with ending the United States' stagflation crisis of the 1970s. Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983.

• Joseph Stiglitz:• “Paul Volcker, Fed Chairman known for keeping

inflation under control, was fired because the Reagan administration didn't believe he was an adequate de-regulator”

• In 1987 the Reagan administration decided to remove Paul Volcker and appoint Alan Greenspan in his place. – Flood of liquidity – Failed levees of regulation.

Greenspan presided over two financial bubbles:– The high tech bubble, – The housing bubble.

He had many of the tools to cope with these crises, but he didn’t do anything.

“Central bank’s duty is to maintain stability of the financial system.”

• In addtition, banks made mega bets with very complicated instruments .

• Loss of confidence. • And the freezing of the credit market.

No. 2: Tearing Down the Walls• The Glass Steagall Act helped compartmentalize the U.S. financial industry in

an effort to prevent future collapses and failures of U.S. banks such as what happened in the 30’s.

• In November 1999, Congress abrogated the Glass-Steagall Act.

• The repeal changed an entire culture: • When repeal of Glass-Steagall brought investment and commercial banks

together, the investment-bank culture came out on top.

• There were other important steps down the deregulatory path:To allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher).

• And the most important thing, nothing was done about the big problem posed by derivatives.

No. 3: Applying the Leeches

• The Bush tax cuts enacted on June 7, 2001.• Tax cuts: especially for upper-income Americans and

corporations.

• The Fed’s decisions to cure this economic disease: - low-interest rates and - more liquidity. Effects on the mortgage markets.The big problem: America’s household saving rate collapsed to zero.

• The Bush rule made interests tax-deductible: encouraged leveraging.

• The law was providing an open invitation to excessive borrowing and lending.

In this situation there were no chains to maintain the situation safe.

No. 4: Faking the Numbers

Current and former executives of credit rating agencies

• The fundamental underlying problem is stock options. • They provide incentives for bad accounting: top

management has every incentive to provide distorted information in order to pump up share prices.

• The rating agencies are paid by the people they are supposed to grade.

No. 5: Letting It Bleed• The bailout package on October 2008 : Bear Stearns, A.I.G, Fannie Mae,

etc.

Situation of the banks :Too many bad loans,Big holes in their balance sheets.

Henry Paulson: “cash for trash” plan : buying up the bad assets and putting the risk onto American taxpayers.

• The looming weaknesses in the economy: American consumption contracted, and the rest of the World economy is also declining.

The US economy needed quick action from government, otherwise the economy would have been more deeply injured.

J. Stiglitz

“The truth is most of the individual mistakes boil down to just one:

A belief that markets are self-adjusting And that the role of government should be

minimal.”

Conclusion