Stiglitz: Our Economic Problems Are Even Bigger Now, Warns of Another Contraction
By Susie Madrak Monday Sep 14, 2009 10:00amIt's not as though I didn't already think this, but hearing someone like Joseph Stiglitz say it out loud is pretty chilling. And he's not the only one, either:
Sept. 13 (Bloomberg) -- Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.
“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”
Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”
A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.’s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.
While Obama wants to name some banks as “systemically important” and subject them to stricter oversight, his plan wouldn’t force them to shrink or simplify their structure.
Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.
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Looks like the poor, hapless billionaires need a few more trillion in welfare from us peons.
Thank Cheezis that welfare reform doesn't effect wealthy white men!
Those Billionaires becoming Millionaires just breaks my heart…
I am sobbing tears by the BUCKETS…
CROCODILE TEARS
This is from the AP today, headline, "Banks' Appetite For Risk Rebounds":
"A year after the financial system nearly collapsed, the nation's biggest banks are bigger and regaining their appetite for RISK.
Goldman Sachs, JPMorgan Chase and others--which have received TENS OF BILLIONS OF DOLLARS IN FEDERAL AID --are once more betting big on bonds, commodities and EXOTIC FINANCIAL PRODUCTS, trading that nearly stopped during the financial crisis.
That Wall Street is making money again IN ESSENTIALLY THE SAME WAYS THAT THRUST THE BANKING SYSTEM INTO CHAOS, last fall is reason for concern on several levels, financial analysts and government officials say."
Is there ANYONE who can explain to me why exactly, after A YEAR, the Obama Administration has not put these institutions on LOCK DOWN??!!
Duh!!! Why in God's name, would Obama allow the banks and Wall Street to continue with the same ol' same ol' that got us into the mess we were in a year ago??!!
To quote the article up top: "While Obama wants to name some banks as “systemically important” and subject them to stricter oversight"....WHA???!!!
Strict regulations of these institutions should have been his FIRST priority after taking office....well, maybe after dealing with stopping torture...
Would somebody please 'splain all this to me?
Thank you.
but part of the problem has to be that of the ten richest members of Congress, 8 are Dems.
Ralph Nader here
Obama's paycheck depends on not understanding the flaws in the system.
The Oligarchs put him in office. They will take him out, unless he were to suddenly stand up and say enough is enough, we are investigating the whole business, we expect indictments.
He hasn't said anything remotely close.
If you don't prop those big banks, the economy collapses. However, If you don't curtail those "too big to fail" institutions, then at some point the economy collapses too.
Maybe we need to figure out a better system than the one we have right now based on perception and the expectation of infinite growth. It seems ridiculous esp. due to the finite reality we live in.
That's heresy on Wall Street.
We printed and borrowed money to replace the deposits they had lost, then they reported very substantial profits.
What did we prop up? What did we avoid?
The CRFB Sees Locusts, Plagues And Lots And Lots Of Budget "Impossibilities" In America's Future
Precisely the propaganda of Henry Paulson, the previous King of Government Sachs.
The facts are otherwise. The economy is damaged because of monetary policy and the relentless push for the use of credit.
In other words: DEBT.
Now we transfer that private DEBT to public DEBT.
Pushing the inevitable collapse back a year or two. Or maybe ten.
We have the converging dual catastrophes of climate change and peak oil, soon to be followed by peak natural gas and peak coal.
Peak everything.
From the Oil Drum:
here
---
Meanwhile we have the war on Democracy"
Consider these clips from the work of the late (d 1988) Australian sociologist Alex Carey
The first and so far only scientifically drawn study of the history of the corporate war on democracy.
CORPORATIONS AND PROPAGANDA
The Attack on Democracy
Part 1 - history through WWII
Part 2 - history after WWII
Mariah Gilardian at TUC radio (user supported) here, produced the clips.
That's why my strategy is to borrow borrow borrow as much as anyone will lend me...at low rates...and put it all into oil futures betting that the price will raise...I'll make MILLIONS I tell ya...MILLLLLIONS! MUWAHAHAHAHAHA!
Links not working . . . at least on my Safari/MacBook Pro system.
The links work for me, Safari 4.03 OS 10.4.11 PowerPC (and doomed to extinction, but at least I am never tempted to run Windows).
The Carey/TUC links are to direct quicktime playback windows. You could right click and down load them.
Let me know because they THE MUST HEAR clips.
Just asking because he was the first person I heard explain that the earth is a closed system with finite resources.
I think he is great.
I thought was a description of GW Bush's skull.
I like him. I recently heard he is considered a radical by some.
But the book that I liked was Wisdom of the Elders, a very non-political book that examined the origin of belief systems. It sampled theories of creation from different aboriginal and isolated peoples from around the globe.
Very deep stuff.
here
He puts it all together.
Thanks for the link Alice I'm watching it now. Great stuff.
Its too bad the issues he discusses are so politicized, because he is mostly speaking in biological terms, the ecosystem we all learned about in high school. There should be much less debate over biological facts, but instead it is converted to a political ideology argument by others.
But the earth is both an open and closed system.
How is it open?
I dropped LSD once and the sky opened up.
Is that what you're talking about moose?
energy from sun
occasional meteorite
it also does lose some energy that gets past the atmosphere
the Chem.E. in me agrees with SM, I also agree: it's totally pedantic
Thinking of it as a closed system with regards to physical resource usage is an adequate model. How much difference can a few meteorites make? And if it's a really HUGE meteorite, we have other issues ...
IIRC, the way Suzuki explained it, we have one earth, surrounded by an atmosphere that not only keeps space garbage (my word) out, it keeps everything we generate in. Closed system.
P.S. Thanks for the link Alice. It was on the old computer, and I forgot all about moving it to this one.
an economist and Marxist (not sure about this but he was on the same wavelength as Herbert Marcuse) wrote about the weaknesses in western economic models in the '30s (including Keynesian) one of which was the inclusion of natural resources as unlimited. I don't think that his ideas were given much credence at the time. (See also the League of Rome, a '70s international group that came to the same conclusion.)
I had not read/heard of Mr. Suzuki. My observations were purely derived from common sense, and the sort of savage capitalist model never made much sense to me.
Neither do these weird cycles in the economy, sometimes I get the impression that we are committing economic suicide by placebo.
The capitalist model has simple premises.
Use other people's money. Let them take the risk.
The legal structure of the Corporation protects the individuals from the consequences of the actions.
The plenitude of the earth, the commodities are used for production which encourages consumption.
Buy low sell high.
Over-consume go bust, over-produce, go bust.
The system crashes, the strong eat the weak, the recycle repeats.
The cycles repeat as long as the underlying structures remain.
The industrial age is predicated on cheap energy. When that is no more and it is coming soon, the industrial age and its variants, the information age etc, WILL BE OVER.
That is not the only problem because history is not symmetrical.
We will have a damaged planet, a population we cannot support, even if many can remember how things were done before the industrial age came about.
To say I am pessimistic is an understatement.
run-down of what's been going on: http://theburningplatform.com/economy/living-...
Given the wide-spread nature of the "toxic-asset" problem, it wouldn't have mattered if there were twice as many players or have as many: if they're all playing the same game than they'll all fail the same way and at the same time.
The only solution is regulate and monitor these players to keep them from getting too exposed to risk. The new financial system needs to have workable checks and balances outside of the government. The bogus bond ratings obtained on the toxic assets is an example of a failed check and balance mechanism.
Instead of worrying about banks getting too big, or discouraging them growing too much, why not stop them from taking big risks? Worrying about too big to fail only matters if they fail, which really reflects how much risk they take. The Canadian banks are very big in their domestic context, but they are prevented from taking too much risk, so they are very healthy and Canada has the most sound banking system in the world.
See:
http://www.reuters.com/article/ousiv/idUSTRE4...
Managing the risk and not the size seems to make more sense in our capitalistic system and managing risk is all about regulation.
Much of the stability of the Canadian Banking system can be traced back to the parsimonious leanings of our parliamentary representatives as many are only a few generations away from their experience in the Old Country. Toss in the climate and you'll find lots of reasons for caution all around (e.g., universal health care).
Stiglitz: Our Economic Problems Are Even Bigger Now, Warns of Another Contraction
________________________________________________________
Okay, take several short breaths in quick succession...
The contractions are getting closer ys!
Banks which got hundreds of billions in taxpayer dollars with little or no oversight/accountability (and which have gone to executive bonuses and compensation faster than they have to addressing the credit crunch or the solvency of the average American) are still not stable?
Maybe it would help if we didn't have Shifty-Eyed Timmy watching the till ...
http://www.youtube.com/watch?v=ThtQTIK3UFw
Simon Johnson:
here
here
The Committee for a Responsible Federal Budget, Paul Volker is a member has released this report:
here
Zero Hedges says this:
The CRFB Sees Locusts, Plagues And Lots And Lots Of Budget "Impossibilities" In America's Future
here
Thanks to the wonders of the internet I will play Kingory free for life with no downloads.
Class is in session and Dr. Nassim Taleb teaches a "birds spinning over the head" Congress a few lessons in economics. It's a crackup video, at least for me.
http://www.askbutwhy.com/2009/09/nassim-taleb-schools-congress.html
Nassim Taleb:
here
for the last 50 years.
http://video.google.com/videoplay?docid=39324...
did it take a Nobel prize to predict that someday we'll have another contraction? Of course we will. The part of the solution of the recent liquidity crisis that required healthier financial institutions to absorb their weaker brethren made it kind of obvious that they would get bigger. Still no crystal ball required. It may not even be necessary for the US to take any action to reduce the size of these behemoths since, as multinationals they are subject to more than one jurisdiction. The Europeans just might do the job for you.
The issue is that the next contraction will be part of this contraction and because the correct policies were not followed, that contraction will be far worse.
These banks are headquartered here, they need to be dealt with here.
have another contraction but it won't have anything to do with the size of these institutions or the causes of the previous meltdown mostly because no one is stupid enough to buy bundles of worthless mortgages or credit default swaps. No the coming one will be a perfectly mundane recession driven by lack of demand and intractable unemployment.
After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.
The bankers plan to buy "life settlements," life insurance policies that ill and elderly people sell for cash -- $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person.
http://www.nytimes.com/2009/09/06/business/06...
It's based on the fact that insurance payouts are not taxable as income.
not suggesting they haven't been.
The boom bust cycles are built into the capitalist system which requires profit and therefore growth. Each cycle sees rising demand which encourages production and then overproduction. This causes a retreat.
The size of the institutions has to do with the merging of various types of operations that do not share the same philosophical basis.
Commercial banks takes deposits of the working class and through fractional reserve banking lend them out. These are protected by the FDIC. The premise is that deposits must be absolutely safe up to the legal limit previously $100k but now (temporarily supposedly) $250k.
Investment banks take the money of the investment class and invest in much riskier business.
Once Reagan bailed out Continental Illinois Bank in 1984, the Fat Cats got the correct idea that they would be bailed out.
Bush I and Clinton bailed out the Savings and Loans, though quite a few people went to jail. See William K Black for that.
Clinton bailed out Long Term Capital Management. On and on. The further down the road they got, the more brazen they were.
Finally there are insurance companies which have strict capital requirements.
After the fraud and speculation of the 1920s and the resulting crash, the Glass Steagall Act separated these outfits, set up the SEC (overseen by the best crook that FDR could find) and set up the FDIC.
The Financial Services Modernization Act of 1999 undid all of this because Citibank had ALREADY merged with Travelers' Insurance, something that should have been forbidden but because of Rubin the deal was done.
Merger mania set in and commercial banks which should be stodgy, dull and completely safe, insurance companies and the real gangsters, the investment banks all merged creating monsters that have now devoured the political class.
They are called TOO BIG TOO FAIL, because they are TOO BIG TOO RESIST. That is the ultimate reason why size matters.
The Sherman Anti Trust act was enacted in 1890 but it took ten years before the Federal Executive, finally under Teddy Roosevelt made full use of it.
Many people say we need FDR today, that will true soon enough but first we need Teddy Roosevelt to break the banks up.
You are absolutely right about the bundled mortgages which is precisely why the Big Banks can't get rid of them. See my other post on Mark to Market versus Mark to Make Believe below.
Except the Fed which HAS BEEN buying them, because we the peons are stupid enough to let them get away with it, the process is as clear as mud as Congress has found out because the Fed won't say what they doing.
As far as credit default swaps, you are absolutely wrong on this one. The Swap market is as strong as ever. It is still not regulated and there is still probably $15 to $20 trillion in the system related to mortgages that will blow up.
Because it is unregulated it is not possible precisely how much is NOT offset. It something like a circular firing squad.
Nothing is mundane about modern finance. But you are right that lack of demand causes further contraction and is fed by unemployment.
There is much uncertainty but back to my original thesis.
The system that first broke in August 2007 when the world realized that the exotic financial instruments for which they had shelled out trillions were only as good as garbage, THAT SYSTEM is still in place. It is not fixed because the Fat Cats who caused it are still in place, they should have lost everything. Some of them should have gone to jail.
Instead we gave them trillions. The government largesse will end, they will finally admit that they are insolvent and the system will blow up even worse.
It will be worse because we have assumed their debt.
Chicken little, is that you?
That's a lot of hyperbole. I wonder how Profs Krugman, Delong and others missed this calamity on the horizon?
Yes, the system is structurally f****d, but you sound as if you're hoping for a total crash in order to prove yourself right.
Frankly, if the economy makes it through to the 2nd QTR 2010 alive, I think we might just survive without another crash.
The old joke is put ten economists in a conference room and you will come away with eleven different opinions.
However there is a sense that that would not be true if the question were about the Fed. Except for the outsiders like Stiglitz, Galbraith, Hudson and to a degree Simon Johnson.
Ryan Grim here
Naked Capitalism here
Mark Thoma after Tim Duy here
Tim Duy original here
The fact is not many economists saw the train wreck coming. Ben Bernanke most of all.
People at the center of the economics profession power structure say nice things about the Fed.
Krugman and Delong I both read. They are insiders.
I will stick with Stiglitz, Simon Johson, James K Galbraith and Michael Hudson who are outsiders.
And with Volker who is shunted aside. You can discern his take through the CRFB reports. See my previous comment here.
Since I am not a professional economist I have nothing to gain or lose. A year ago I began reading everything I could.
I think right now we have a sucker's rally in the stock market and this is like 1930, the last great sucker's rally.
It will be bad. It will be even worse in Bernanke succeeds in re-inflating the great bubble.
So those guys standing on the street corner holding the signs that say, "The End is Near", really are financial prophets?
They are talking about supernatural and therefore, presumably unavoidable events.
I don't buy any of that for a minute.
It is the avoidable that is of interest to me.
Thank you for the clarification. And for pointing out what is of interest to you.
the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.
I'm wondering when people will figure out that these people ARE the government. The big money banks and transnational corporations run the show. That's why there is "wariness". Follow the money.
Aug. 5 (Bloomberg) -- Almost half of U.S. homeowners with a mortgage are likely to owe more than their properties are worth before the housing recession ends, Deutsche Bank AG said.
The percentage of “underwater” loans may rise to 48 percent, or 25 million homes, as prices drop through the first quarter of 2011, Karen Weaver and Ying Shen, analysts in New York at Deutsche Bank, wrote in a report today.
As of March 31, the share of homes mortgaged for more than their value was 26 percent, or about 14 million properties, according to Deutsche Bank. Further deterioration will depress consumer spending and boost defaults by borrowers who face unemployment, divorce, disability or other financial challenges, the securitization analysts said.
“Borrowers may also ‘ruthlessly’ or strategically default even without such life events,” they wrote.
Seven markets in states with the fastest appreciation during the five-year housing boom -- including Fort Lauderdale and Miami, Florida; Merced and Modesto, California; and Las Vegas -- may find 90 percent of borrowers underwater, according to the report.
The share of borrowers owing more than 125 percent of their property’s value will increase to 28 percent from 13 percent, according to Weaver and Shen.
Home prices will decline another 14 percent on average, the analysts wrote.
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net
http://www.bloomberg.com/apps/news?pid=206030...
In 2006, my house was valued by the county (tax rolls) at $214,000, and you couldn't buy a house in my neighborhood for less than $225,000, they rarely came up for sale, and more than a month on the market was unheard of.
In 2007, my house was valued at $203,000.
2008-$187,000
Just got the new 'THIS IS NOT A BILL' statement and my house is now valued at $154,000.--a neighbor just took her house off the market because it hadn't sold in a year--at $145,000 even.
Losing money just sitting here.
to tex-ass, these asswipes in the realestate co. keep saying it is all good here. The county tax people refuse to lower any home owners taxs.
This was a plan from the get go. People,(the ones with good jobs) put good down payments on there homes. Drove up homes prices any way they could. Back in 2002-2005 in Arizona in Florence, a lot out side of town was going for $125,000 for 1.25ac, no water,no electrc. Tell me this is not bullshit. the realtors kept pushing the price up,up and up. the people from calf were comming to Az with there $750,000 for there 3BR 1400sq ft home and just driving the homes up. People were refinanceing there homes,getting money and going out and buying toys with the money they got. Then about 2007 the crash started. It had started befor 2007 but the bankers just did not tell any one. Then in 2008, I think the bankers could see that Obama was going to be President. You rember, bush and his banking buds came out with the 700 billion bail out. Must get this done be for the 2008 elections. It was not just the repugs who did this, they had plenty of help from the dems. This shit bill to bail out the rich bankers and dump the banks who did not go along with there shit. Hell look a the histroy of the banking world. this is not the first time they have done this. I don't know what you call rich but people who were not within there circle of friends were dumped right long with the middel class. The middel class was getting to much money. Time to rign it all back in. Look at the people who are still in the money, look at the names of the rich who have had money back to 1930's. Most of the same people back then that came out with out a scrach are still commming out of this one with out a scrach.
Why, people just do not care. They are watching the bullshit on the TV. TV, when you control TV, radio, You control everything.
In August there were 358,000 foreclosure notices, Bloomberg here
My neighborhood because of variety of factors, ethnicity is the leading one, has been undervalued for a long time.
Houses peaked in '03-'06 at $160,000.
There have been several that have sold recently for $20,000.
...the crooks ran up the stock market, and are planning to sell high and crash the rest of us.
Thank you for the big K.I.S.S.!!
Is that a compliment? If so, you're welcome, I guess.
Yes, it is. You kept it simple. The simplest explanations are the best and speak volumes more than long convoluted explanations with internet linkies attached.
The long explanations with internet linkies are for those who wish to track the research and thereafter come to their own, albeit even a different conclusion.
That is not to say that I don't appreciate conciseness of thought.
Now that the sub-prime loans have pretty much worked their way through the system, the next wave of defaults will be people with good credit who've lost jobs they can't replace. These people have now exhausted their financial resources staying afloat and are in serious trouble. These were not speculative loans but solid mortgages by well-qualified earners.
Evidence? The record number of bank failures sweeping the country.
I don't disagree with the first statement, see my previous posts.
I don't disagree about the bank failures but I do disagree on the linkage of the two.
The big banks have been bailed out, they would have required something beyond FDIC.
The were kaput because of the fraudulent CDOs, collateralized debt obligations which were bundles of liar loan mortgages.
These were $500 million a crack, $1 billion a crack. Fraudulently bundled and fraudulently rated CRAP.
Instead of sending the crooks to jail, we bailed them out. They still have much of that crap in their possession but FASB, the private accounting standards board which we the peons foolishly allow through our government, permit the big banks to use PHONY ACCOUNTING STANDARDS to describe what they are worth.
Mark (as in price declared) to market (as in what you could actually sell it for) is what they should be using.
Now they get away with mark to make believe rather than mark to market. If they said what they really are worth then they would have to admit that they are bankrupt. Just like the regional banks.
The regional banks did not go into securization vis a vis consumer mortgages because they were too small.
That left commercial mortgages which they did go into big time. Now those are in the tank and the regional banks are going belly up left and right.
There are more shoes to drop.
One of those shoes will no doubt be a wave of bankruptcies and foreclosures on middle (and upper middle) class people who are no longer gainfully employed.
Leave it to Susie to find the only economist in America that thinks things are going to get worse. I know the picture isn't all rosy but for christ's sake,if Obama hadn't acted when he did the way he did we would all be eating out of dumpsters by now. It takes time for things to get better. Crying wolf doesn't help anyone.
Consider that the Wacked-out Right, screaming about a "government takeover" of "everything", could very well prevent the government from doing anything more about the banking industry, claiming that it was "yet another example of the Obama Administration's desire to turn this into a Communist country."
Their insanity was "innocent" before, but is quickly pushing this country towards fiscal disaster. (I include healthcare in that.)
Boy, those teabaggers sure are going to protest so loudly when the fat cats get another bailout.
They sure are.
Right?
that the exec bonuses aren't big enough. If the astro-turfers can get medicare recipients screaming "keep the governments hands off my medicare" they can get them to do that.
when you let fat lazy useless scum rake in billions while the working people suffer. Happens every time. Nothing new about it in the least. Welcome to open class warfare.
Any one ever see this:http://www.**************.com/
sounds kinda like some one knew.
Zeitgeist the movie.
Sep 11 2009, 10:41 am by Ronald Brownstein
Closing The Book On The Bush Legacy
Thursday's annual Census Bureau report on income, poverty and access to health care-the Bureau's principal report card on the well-being of average Americans-closes the books on the economic record of George W. Bush.
It's not a record many Republicans are likely to point to with pride.
On every major measurement, the Census Bureau report shows that the country lost ground during Bush's two terms. While Bush was in office, the median household income declined, poverty increased, childhood poverty increased even more, and the number of Americans without health insurance spiked. By contrast, the country's condition improved on each of those measures during Bill Clinton's two terms, often substantially.
The Census' final report card on Bush's record presents an intriguing backdrop to today's economic debate. Bush built his economic strategy around tax cuts, passing large reductions both in 2001 and 2003. Congressional Republicans are insisting that a similar agenda focused on tax cuts offers better prospects of reviving the economy than President Obama's combination of some tax cuts with heavy government spending. But the bleak economic results from Bush's two terms, tarnish, to put it mildly, the idea that tax cuts represent an economic silver bullet.
Economists would cite many reasons why presidential terms are an imperfect frame for tracking economic trends. The business cycle doesn't always follow the electoral cycle. A president's economic record is heavily influenced by factors out of his control. Timing matters and so does good fortune.
But few would argue that national economic policy is irrelevant to economic outcomes. And rightly or wrongly, voters still judge presidents and their parties largely by the economy's performance during their watch. In that assessment, few measures do more than the Census data to answer the threshold question of whether a president left the day to day economic conditions of average Americans better than he found it.
If that's the test, today's report shows that Bush flunked on every relevant dimension-and not just because of the severe downturn that began last year.
http://politics.theatlantic.com/2009/09/closi...
Until we start making things again. Physical things. Not just fancy market gimmicks.
Obama should have made regulation priority one and broken up the too big to fail institutions straight away , now that we've been ripped off and soaked and they're making big $ again it's going to be tough to do . Too many whores on both sides of the isle who just love the lobbyists and all of that dough .
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