Joseph Stiglitz: “Restructuring debt is not the end of the world”
The Nobel Prize for Economics in 2001, Joseph Eugene Stiglitz, did not disappoint yesterday in Sitges warning, in the days of the Cercle d’Economía, about the vicious circle of fiscal austerity agreed by the governments of the euro zone. In less than half an hour, he makes a critical assessment of the management of the great recession under Obama while mocking the existing taboo about a restructuring of the debt of countries like Greece.
Obama began to disappoint since he entered the White House with Lawrence Summers as chief economic adviser and promoting Timothy Geitner … From “yes, we can (change)” to “no, we will not”. How powerful is Wall Street?
It is true that the profile of his economic team was not a good omen. These were those who, in the mid-1990s, fostered financial deregulation policies that allowed all excesses and favored rescues that nullified the notion of risk. So of course it could not be the team responsible for a new economic policy. From there you can analyze their performance in the face of the great recession. In the first place, a Keynesian stimulus plan was necessary and that of Obama was much better than that of Bush, but he fell short of the infrastructure costs. And this was because the old team, those who generated the financial and real estate bubble, had a hard time realizing the magnitude of the disaster. Obama was also wrong to let Congress amend his stimulus plan by giving too much emphasis to tax cuts and including favors to different sectors. The second priority was to help the states massively. All but one must balance their budgets by reducing spending in the same proportion that revenues decline due to the recession. As a result, today there are fewer public employees than in 2007, the public sector has aggravated unemployment instead of acting cyclically.
And the management of the mortgage crisis?
Insufficient. Obama rejected a law that would have allowed restructuring of mortgage debts. Result: seven million families have lost their homes and it is expected that two more will be lost this year. And the latest data show another acceleration of the price drop that already exceeds that recorded in the Great Depression. It is a total disaster.
Obama ended up pleading with Wall Street on financial regulation.
The main success was to avoid the collapse of the financial system. The downside was that of not demanding conditions in exchange for a rescue of 800,000 million dollars. It did not avoid the excessive premiums of the operators, it did not know how to combine incentives with sanctions. And that in terms of social cohesion has been a disaster, to rescue the bank and not worry about the foreclosed and unemployed … Another mistake has been not to prohibit the financial entities backed by the deposit guarantee fund to place their bets in the derivatives markets, risking the taxpayer’s money. Because the objective is to get banks to lend money again, to finance the real economy. The last omission was not to face the problem of banks too big to fail. The problem is even greater than before the crisis, few banks, very, very large.
With Mario Draghi, it seems that European leaders are inclined towards the American system. Going through Goldman Sachs, expert in creative accounting at the service of Greece, is a plus. Do you know him?
I do not know him very well but I know he is brilliant. I do remember that he was in charge of leading the Financial Stability Board after the crisis in Southeast Asia in 1997 and 1998. His mission was to propose regulatory and supervisory measures to prevent the recurrence of new financial crises. Judge yourself if you succeeded. As for Goldman Sachs, they have already been sanctioned, they are being investigated and it can be clearly said that they went overboard (designing incomprehensible products, using customer information for their own benefit, etc.). I do not know if the money makers or Draghi learned the lesson. In September, Ben Bernanke, one of the architects of the crisis, reiterated his faith in economic science!
The euro zone is going through difficult times.
The central issue is the restructuring of the debt. The heads of the European Central Bank say it is unthinkable. They should have thought before, when they allowed the banks to borrow beyond the reasonable and operate with financial derivatives. The regulation could have avoided it and now exclude the possibility of a restructuring alluding to the enormous volume of the problem is an error. History shows that an orderly restructuring of sovereign debt is possible. Because, it must not be forgotten, that without economic growth it is impossible to return the debts. And both in the euro zone and in the United States, simultaneous policies to reduce the public deficit are tantamount to condemning their economies to five or ten years of stagnation. And with weak growth, few taxes are collected and the public deficit is not reduced.
And in the case of Greece?
I repeat: without growth you can not pay your debts. An orderly restructuring is possible. It’s not the end of the world. It is serious for shareholders and investors in sovereign debt. They lose money but they do not lose everything. It is about putting the taxpayers, the workers, the mortgaged owners, over the bankers. And, in the worst case, there is always the possibility of an exit from the euro to gain competitiveness.