Posted by Neil H. Buchanan
[Note: The first billboard that I saw when I arrived in Austria earlier this week was for Burger King (advertising Der Whopper), which was grimly funny from the standpoint of American cultural imperialism but simply grim for me as a vegan. I am tempted to write this post about being a vegan in a foreign land, but I'll save that for perhaps another day.]
This month's issue of The Progressive (contents apparently unavailable online to non-subscribers) includes an interview with Joseph Stliglitz, the Columbia economist who is perhaps best known for his fierce attacks on the economic orthodoxy known as the IMF-Washington Consensus. Stiglitz, who also won the quasi-Nobel prize for his brilliant work on the shortcomings of markets due to imperfect information, has spent the last few years arguing that the neoliberal prescriptions (deregulating financial markets, radically reducing social safety nets, etc.) that the US and its international arms impose on other countries are both immoral and ineffective.
Perhaps of more current interest, Stiglitz has been an unrelenting critic of the Obama economic team, in particular Larry Summers. Stiglitz recently said of the Obama team that they are "either in the pocket of the banks or they're incompetent." He explains further in the interview that "in the pocket of the banks" need not mean "on the take" but simply describes having adopted a mindset that sees the world the way bankers would like policymakers to see it. That certainly does seem an apt description of Geithner, et al.
Stiglitz makes two further points that I found especially interesting:
(1) "Wall Street banks have used the same tactic that Bush used in the war on terror -- fear -- and they've basically said that if you don't do what we tell you ... it will be the end of capitalism as we know it." The interesting thing about this provocative comparison is that the analogy works not just on the initial level -- two broad policy mistakes that were perpetrated by taking advantage of mass panic -- but it carries through to deeper levels as well. In both the terror situation and the financial crisis, there really is something horrible going on, and it thus makes sense to fear for our continued existence.
That is why, for example, I have defended the TARP and the Fed's actions, because they were (I continue to believe) absolutely necessary to stop the economy from going into freefall. Similarly, many people believe (though I do not, for reasons not pertinent here) that the Afghan war was "the good war" and that things like near-strip-searches at airports are acceptable. The question is not whether doing nothing at all is an option, because it was not in either case.
Stiglitz does not actually disagree that the financial bailouts were necessary. He does argue, however, that the problems were misdiagnosed. For example, the bailout of Citibank pretty much said to the world that Citi was in huge trouble. If, instead, we had forced Citi to restructure, that would not have sent any worse message to the markets or the public, Stiglitz points out. Still, our leaders chose the route that maximized the happiness of the bankers. Stiglitz, in fact, argues generally that the problem is that the government simply did not extract enough concessions from the banking system in exchange for the trillions that we gave them.
(2) Stiglitz endorses the notion of a two-tiered banking system, with a government component. That is, he argues that banks have incentives to prey on the poor, to serve them badly (if at all), and to charge exorbitant fees. He thus suggests that the government could simply set up a banking system to provide basic financial services to the poor (check cashing, etc.), while allowing private banks to deal with people who actually have some ability to protect themselves from predation. Do you think Chuck Grassley and Max Baucus would like that idea? For that matter, what would Chuck Schumer (guardian of New York's financial class, though a progressive on most other issues) spew upon hearing this?
I argued during the Presidential transition in January that Stiglitz would have been a great choice for Obama's chief economist. He keeps proving it.