4 May 2009

Stiglitz Dateline Interview transcript

This week, Dateline speaks with Nobel Prize laureate Joseph Stiglitz about the world's descent into recession.
GEORGE NEGUS: Joseph Stiglitz, it is good to talk to you again. We have just seen on our program demonstrations in New York over the so-called global financial crisis and its impact. We have seen dole queues getting longer and longer in Ireland by the day. This is impacting all over the world, isn't it? We are talking about a global recession here, even though we find it hard to get that r-word out of our mouths.

PROFESSOR JOSEPH STIGLITZ, ECONOMICS NOBLE LAUREATE: Definitely. This is the first year of negative global growth that we have had since the Great Depression.

GEORGE NEGUS: So what you think about the attempts being made to solve this problem? I understand that you regard what Barack Obama is doing - his stimulus package - as "ersatz capitalism", I think you called it. Is that really the way to go?

PROFESSOR JOSEPH STIGLITZ: He has done a number of things that are very positive, particularly when compared to what happened before under the Bush administration, you have to give him an A-plus. The stimulus package is not as large as I would have liked, too much of it is in the form of a tax cut. But it is still substantial. It was an outrage that we were pouring money into the banks, but we were not doing anything for the underlying problems - the Americans that were being forced out of their homes in foreclosures. Obama is finally doing something. Again, the foreclosures are continuing. But the real problem is the bank bailout, and that is the one that I have been most critical of. That is the one I have labelled "ersatz capitalism", where you privatise profit but socialise losses.

GEORGE NEGUS: We are hearing on a daily basis with monotonous regularity it seems, about the banks that are "too big to fail". Should we just let them fail or what? How do we solve that problem? The banks caused that problem and it would seem that they remain the problem.

PROFESSOR JOSEPH STIGLITZ: What I emphasise is the difference between banks that are too big to fail and bailing out the bankers, shareholders and the bond holders, and we could restructure the banks - financial reorganisation - allow them to continue as organisations, but convert the debt into equity, wipe out the shareholder value, and, in fact, for most of the banks, even some of the banks that are very deeply in trouble, a debt to equity conversion would actually solve the problems without requiring any - or very much - taxpayer money.

GEORGE NEGUS: Are we talking about nationalisation of the banks? That the taxpayer today has to pay for the failures of the market in the past?

PROFESSOR JOSEPH STIGLITZ: The way I proposed it is one where the taxpayers would not have to pay very much. We do it all the time. We have been doing it in the US for our smaller banks, it's called conservatorship, if you don't want to use the word 'nationalisation'. We did it even for big banks, back in 1984 with Continental Illinois. And we shouldn't confuse this with words like 'nationalisation'. Some people prefer calling it 'pre-privatisation' because what you do is you restructure the banks, you put them on a sound financial basis and then sell them back to the private sector. No-one really wants the government to be permanently in this business. But what is clear is the private sector has made a mess of it. And I do not think that the taxpayer should have to continue to pour out hundreds of billions of dollars, when there is an alternative, and there is an alternative.

GEORGE NEGUS: Joseph, Barack Obama said just a few days ago that he thinks there is a glimmer of hope. Is that just feel-good politics as distinct from the reality that this is really a serious, long-term problem?

PROFESSOR JOSEPH STIGLITZ: This is really a serious and long-term problem. Of course, there are going to be moments when things are better and when things are worse, and I think that in the immediate aftermath of September 15 things were very bad. Things are picking up off of that bottom, but it would be, I think, delusional to think we are really returning the economy to a healthy situation. Just look at one basic fact. What kept the American economy going before the crisis was the fact that our consumption binge - savings went down to zero. Now savings is going up 4% or 5%. And good for the long-run balance sheet, but not good for keeping the economy going in the short run.

GEORGE NEGUS: Joseph, we hear people - economists, bankers, analysts - saying that maybe we will come out of this globally by the end of this year, by the end of next year. What is your punt?

PROFESSOR JOSEPH STIGLITZ: The answer depends partly on what we do - whether we take strong actions - unfortunately, what we've done in rekindling lending in the US has been totally inadequate and therefore, that may be imposing constraint on the recovery. I think it is important to remember too that the fact that the economy is no longer in freefall doesn't mean that we are in a robust recovery. I think that is what we have to worry about. We have to make sure that we have the foundations for a robust recovery and that seems a little bit far along the horizon.

GEORGE NEGUS: You are chairing the UN panel, Joseph, that is looking at the whole problem of this global economic downturn. Is it really possible to regulate the world economy so that the situation we are in now does not repeat itself?

PROFESSOR JOSEPH STIGLITZ: I think there is a global consensus that there is a need for a comprehensive global regulatory system, that you cannot have a system in which there are pockets in which people can escape oversight. As you say, the real problem is putting that into place, and so what we are going to do if we do not get a strong global regulatory system is to put the onus of regulation within each country - and strong countries - the countries that know how to - who want to avoid another economic downturn - will insist that anybody playing on their turf play by their rules.

GEORGE NEGUS: You are actually talking about the control of the so-called free market. Can we put it as crudely as that? Because the free market has become a pretty expensive thing of late.

PROFESSOR JOSEPH STIGLITZ: The free market did not work in the way that its advocates claimed, but we've never had a totally free market.


PROFESSOR JOSEPH STIGLITZ: Any game - and the market is an important game - has to have rules and referees, and we know that. The problem is that the financial institutions actually paid the referees to go off the field, induced parliaments and Congresses to strip away the regulation appoint people who did not believe in regulation to have charge of the remnants of the regulatory system, and, not surprisingly, the system did not work. So we have to go back to a world in which we have rules.

GEORGE NEGUS: And trust?

PROFESSOR JOSEPH STIGLITZ: Rules that make sure the system works. That is going to be absolutely necessary if we are going to have a restoration of trust.

GEORGE NEGUS: Is it possible to say then that it is not so much capitalism that we need to get rid of, but certain sorts of capitalists?

PROFESSOR JOSEPH STIGLITZ: It is not that any particular individual, or a group of individuals, is particularly bad. If you give wrong incentives, people behave badly, and we allowed the banks to have perverse incentives that encouraged excessive risk-taking, greed - call it what you will - and that has to be what is stopped. And I think then you can have a market system that does what it is supposed to do.

GEORGE NEGUS: Well, given this whole thing seems to have its origins in Wall Street, Gordon Gecko's old line that "Greed is good" is quite the opposite from where we stand now.

PROFESSOR JOSEPH STIGLITZ: Absolutely right. In fact, greed has led to high cost, felt not only in the United States, but all over the world.

GEORGE NEGUS: If you were able to get into Barack Obama's ear today, what would you be telling him to do that he isn't currently doing?

PROFESSOR JOSEPH STIGLITZ: Well, I think the most important thing is a new plan for getting our financial system working again, getting our banking system working again. The way that it has been done is unfair, puts too much of a burden on taxpayers, and isn't working, quite frankly. So we are paying a high price and getting nothing for it. And so we need a Plan B. I think it is time now to have a broader discussion of what that Plan B might look like.

GEORGE NEGUS: So you do not think that bailouts and stimulus packages are enough? You're talking about a total rethink, a total restructure of the way we are doing things, economic and financial?

PROFESSOR JOSEPH STIGLITZ: Too many people in the financial markets, who have done so well in the past, want to just go back to where we were in 2007 before the crisis. We can't do that and we shouldn't do that. My view of what our Plan B should have very much at its basis - a vision of what kind of a financial system will work, not only just for America, but for the whole world.

GEORGE NEGUS: Joseph, good to talk to you, thank you very much. And I hope someone is listening because you always seem to make a lot of sense.


You can watch the interview online here.

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