During the economic turmoil of the last few years, Nobel Prize-winning economist and Columbia University professor Joseph Stiglitz has been one of the most strident and incisive critics of the historic bailout of the banking sector.
HuffPost interview excerpted:
With so much talk of a recovery, where is our economy right now?
The way I put it is that, if you look back before the crisis, the American economy was basically supported by a housing bubble, which supported a consumption boom. In one year, we had $950 billion in mortgage equity withdrawals. That got reflected in the statistics and our savings rate went to zero.
The implication is that post-crisis, even if we have our banking system work, it is not likely that we will go back to a zero savings rate in the U.S. If we don’t go back to a zero savings rate, it’s going to be hard to have a robust recovery unless you find something else to fill in the gap.
A recovery is predicated on the financial sector working, but obviously the sector isn’t working. And there is another set of problems: Small businesses can’t get loans. We are in that dynamic process now, where some of the things that we did [to steady the economy] have the characteristics of stretching out our economy’s adjustments. These steps buoyed the economy in the short run, but may be more likely to extend the length of the downturn.
Our response to the crisis was party based on a fundamentally flawed theory. The theory was that we were having a psychological problem, and that if we could only restore confidence then the economy would go back to normal. Of course, we had a psychological problem, which was the bubble, but we’re back to reality now.
This approach is having profound implications that are likely to last. In 2010, the projections say that there will be between 2.5 to 3.5 million foreclosures, more than the 2 million that occurred in 2009. So, that’s an example of the dynamics going the wrong way, probably because we put in place the wrong policies… Read more at Huffington Post
haplif – Frank Kalder (Global Haplifnet)