Stiglitz: Obama Confused Saving the Banks with Saving the Bankers

http://www.democracynow.org/2009/2/25/stieglitz 

Nobel Prize-Winning Economist Joseph Stiglitz: Obama Has Confused Saving the 
Banks with Saving the Bankers 

Democracy Now! Interviews Joseph Stiglitz, February 25, 2009 

We get reaction to President Obama's speech from Nobel economics laureate 
and former World Bank chief economist, Joseph Stiglitz. Stiglitz says the 
Obama administration has failed to address the structural and regulatory 
flaws at the heart of the financial crisis that stand in the way of economic 
recovery. Stiglitz also talks about why he thinks Obama's strategy on 
Afghanistan is wrong and that Obama's plan to keep a "residual force" in 
Iraq will be "very expensive." On health care, Stiglitz says a single-payer 
system is "the only alternative." 

AMY GOODMAN: To talk more about President Obama's speech, I'm joined in the 
firehouse studio by Nobel Prize-winning economist Joseph Stiglitz, professor 
at Columbia University, former chief economist at the World Bank, and 
co-author of The Three Trillion Dollar War: The True Cost of the Iraq 
Conflict. 

Welcome to Democracy Now! 

JOSEPH STIGLITZ: Nice to be here. 

AMY GOODMAN: Your first assessment of the speech last night? 

JOSEPH STIGLITZ: Oh, I thought it was a brilliant speech. I thought he did 
an excellent job of wending his way through the fine line of trying to 
say-give confidence about where we're going, and yet the reality of our 
economy-country facing a very severe economic downturn. I thought he was 
good in also giving a vision and saying while we're doing the short run, 
here are three very fundamental long-run problems that we have to deal. 

The critical question that many Americans are obviously concerned about is 
the question of what do we do with the banks. And on that, he again was very 
clear that he recognized the anger that Americans have about the way the 
banks have taken our taxpayer money and misspent it, but he didn't give a 
clear view of what he was going to do. 

AMY GOODMAN: Let's go to the clip last night. During his speech, President 
Obama acknowledged more bailouts of the nation's banks would be needed, but 
didn't directly say, as Joe Stiglitz was saying, whether the government 
would move to nationalize Citigroup and Bank of America. 

  PRESIDENT BARACK OBAMA: We will act with the full force of the federal 
government to ensure that the major banks that Americans depend on have 
enough confidence and enough money to lend even in more difficult times. And 
when we learn that a major bank has serious problems, we will hold 
accountable those responsible; force the necessary adjustments; provide the 
support to clean up their balance sheets; and assure the continuity of a 
strong, viable institution that can serve our people and our economy. 

  Now, I understand that on any given day Wall Street may be more comforted 
by an approach that gives bank bailouts with no strings attached and that 
holds nobody accountable for their reckless decisions. But such an approach 
won't solve the problem. And our goal is to quicken the day when we restart 
lending to the American people and American business and end this crisis 
once and for all. And I intend to hold these banks fully accountable for the 
assistance they receive, and this time they will have to clearly demonstrate 
how taxpayer dollars result in more lending for the American taxpayer. 

AMY GOODMAN: President Obama on Tuesday night. Joe Stiglitz, is he holding 
the banks accountable? 

JOSEPH STIGLITZ: Well, so far, it hasn't happened. I think the more 
fundamental issues are the following. He says what we need is to get lending 
restarted. If he had taken the $700 billion that we gave, levered it 
ten-to-one, created some new institution guaranteed-provide partial 
guarantees going for, that would have generated $7 trillion of new lending. 
So, if he hadn't looked at the past, tried to bail out the banks, bail out 
the shareholders, bail out the other-the bankers' retirement fund, we would 
have easily been able to generate the lending that he says we need. 

So the question isn't just whether we hold them accountable; the question 
is: what do we get in return for the money that we're giving them? At the 
end of his speech, he spent a lot of time talking about the deficit. And 
yet, if we don't do things right-and we haven't been doing them right-the 
deficit will be much larger. You know, whether you spend money well in the 
stimulus bill or whether you're spending money well in the bank 
recapitalization, it's important in everything that we do that we get the 
bang for the buck. And the fact is, the bank recovery bill, the way we've 
been spending the money on the bank recovery, has not been giving bang for 
the buck. We haven't gotten anything out. 

What we got in terms of preferred shares, relative to what we gave them, a 
congressional oversight panel calculated, was only sixty-seven cents on the 
dollar. And the preferred shares that we got have diminished in value since 
then. So we got cheated, to put it bluntly. What we don't know is 
that-whether we will continue to get cheated. And that's really at the core 
of much of what we're talking about. Are we going to continue to get 
cheated? 

Now, why that's so important is, one way of thinking about this-end of the 
speech, he starts talking about a need of reforms in Social Security, put 
it-you know, there's a deficit in Social Security. Well, a few years ago, 
when President Bush came to the American people and said there was a hole in 
Social Security, the size of the hole was $560 billion approximately. That 
meant that if we spent that amount of money, we would have guaranteed 
the-put on sound financial basis our Social Security system. We wouldn't 
have to talk about all these issues. We would have provided security for 
retirement for hundreds of millions of Americans over the next seventy-five 
years. That's less money than we spent in the bailouts of the banks, for 
which we have not been able to see any outcome. So it's that kind of 
tradeoff that seems to me that we ought to begin to talk about. 

AMY GOODMAN: So, you say Obama, too, has confused saving the banks with 
saving the bankers. 

JOSEPH STIGLITZ: Exactly. 

AMY GOODMAN: Should they all have been fired? 

JOSEPH STIGLITZ: Well, I think one has to look at it on a bank-by-bank 
basis. Clearly, the banks that have not been managed very well, we need to 
not only fire them, we have to change their incentive structure. And it's 
not just the level of pay; it's the form of the pay. Their incentive 
structures encourage excessive risk taking, shortsighted behavior. And in a 
way, it's a vindication of economic theory. They behaved in the 
irresponsible way that their incentive structures would have led them to 
behave. 

AMY GOODMAN: Explain that. 

JOSEPH STIGLITZ: Well, if you get an incentive structure where you say you 
get huge pay if things go well, but you don't pay any consequences if things 
go badly, and you're going to look at it only in terms of the profits that 
you make this year, not the losses that you make next year and the year 
after, then of course you're going to try to get a gamble, because if you 
gamble and you win, you walk off with the money; if you lose, somebody else 
picks up the losses. 

So what happened was, the banks gambled. They gambled very big. They had big 
profits for four years. But in the fifth year, the losses were greater than 
all the profits that they had in the first four years. But meanwhile, they 
walk off with the bonuses based on the four-year performance, and then, the 
fifth year, they don't-I mean, it was quite remarkable, they didn't 
even-they even got big bonuses for the record losses. Then that's what, of 
course, has gotten Americans angry, so that the bonuses were described as 
incentive pay. But that was all a charade. 

But the basic thing is, you know, our bankers are-many of them, not all of 
them-are, you might say, ethically challenged. But even were not they 
ethically challenged, the fact is they had incentive structures that led 
them to behave in the way they did. 

AMY GOODMAN: Should the banks be nationalized? 

JOSEPH STIGLITZ: Many of the banks clearly should be put into, you might 
say, conservatorship. Americans don't like to use the word 
 "nationalization." We do it all the time. We do it every week. 

AMY GOODMAN: Explain. 

JOSEPH STIGLITZ: Well, if banks don't have enough capital so that they can 
meet the commitments they've made to the depositors, at the end of every 
week the FDIC looks at the balance sheet, and it says, "You don't have 
enough capital. You're not allowed to continue." And then what they do is 
they either find some other bank to take it over and fill in the hole, or 
they take it into government control-it sounds terrible, to take it into 
government control-and then sell it. 

And that's what other countries have done when they faced this kind of 
problem-the countries that have done it well. One of the important lessons 
is this is the kind of thing can be done well, could be done badly. And the 
countries that have done badly have wound up paying to restructure the bank 
20, 30, 40 percent, even 50 percent of GDP. We're on our way to that kind of 
debacle. But that shows you how bad things can be, how costly it can be, if 
you don't do it well. 

AMY GOODMAN: We're talking to Joe Stiglitz. He won the Nobel Prize in 
Economics in 2001, professor at Columbia University, former chief economist 
at the World Bank. We'll be back with him in a minute. 

[break] 

AMY GOODMAN: Joe Stiglitz, our guest, he's the Nobel Prize-winning economist 
from Columbia University and co-author of The Three Trillion Dollar War: The 
True Cost of the Iraq Conflict. 

So, you're saying small and big banks are being treated differently. 

JOSEPH STIGLITZ: Very much so. The small banks were shut down. The big 
banks-Citibank, Bank of America-we're giving huge bailouts. 

Most interesting case is actually AIG, not even a bank, and we poured in 
$150 billion. Originally, they said they only needed $20 billion. And then, 
every few hours, every few days, the losses got bigger, [inaudible] another 
$60 billion. Now, that fact, the fact that we keep getting bad news and have 
to pour money in, should make us really worried. The question is, why did we 
bail out AIG? What they said is, the reason we bailed it out is if we didn't 
bail it out, there would be consequences somewhere else. They didn't tell us 
where. 

It would make much more sense if we looked at where the consequences were 
and deal with the problems as they turn out. Just for instance, some of the, 
quote, "insurance policy derivatives" were not in the United States. The 
people that would have problems may be gamblers, may be other institutions 
abroad. Do American taxpayers want to be bailing out institutions abroad? 
That's a question we ought to be debating. There may be pension funds that 
may be hurt. Well, some of the pension funds may be able to withstand it; 
other pension funds will need to have assistance. But let's get the money 
going to where we think it ought to go, rather than this trickle-down 
approach that we've been using with AIG. 

AMY GOODMAN: Very quickly, which countries do you think did things well, and 
which didn't? 

JOSEPH STIGLITZ: Well, Sweden and Norway did things very well back in the 
end of the '80s, beginning of the '90s. 

The UK, I think, has been doing it much better than the United States. Its 
problems are bigger- we have to realize that-because its banking sector was 
a more important part of the economy, and one of the banks actually had 
liabilities greater than the GDP of the UK. So it's going to be facing a 
very difficult time. But the fact of the matter is, the way Gordon Brown did 
it, replacing the heads of the banks-it was real sense of accountability 
there. Government got control and shares commensurate with the money that it 
was paying in-it wasn't a giveaway-and now trying to make sure that they 
start lending, forward-looking. So it's clearly-they have a much clearer 
concept of what is needed. 

AMY GOODMAN: Why is Obama saving these bankers? 

JOSEPH STIGLITZ: Well, we could all guess about the politics. We know one of 
the problems about American politics is the role of campaign contributions, 
and that's plagued every one of our major problems. Under the Bush 
administration, we couldn't deal with a large number problems, like the oil 
industry, like the pharmaceutical, the healthcare, because of the influence 
of campaign contributions. Now, my view is, one of the problems is that 
whether it's because of that or not, it lends an aura of suspicion. The fact 
that there was so much campaign contributions from the financial sector at 
least raises the concern. 

Now, there is one other legitimate concern, that Wall Street has done a very 
good job of fear mongering. They say, "If you don't save us, the whole 
system will go down." But, you know, when these banks that I talked about 
before, when they go down, there's not even a ripple. The fact is, you 
change ownership. It happens on airlines all the time. An airline goes 
bankrupt, a new ownership, financial reorganization-not a big deal. What 
they've succeeded in doing is instilling a sense of fear, so that it's a 
kind of paralysis that hangs over what we're doing. And you could understand 
a politician. He's been told if you do one thing, the whole system-the sky 
is falling, it's going to fall. That induces political leaders to try to do 
the smallest incremental step, and that's what got Japan in trouble. 

AMY GOODMAN: And your thoughts on Geithner and Summers? Can they handle 
this? What do you think of them as the economics team? 

JOSEPH STIGLITZ: Well, the question is, are they willing to take the bold 
measures that are necessary? Everybody keeps saying we need to take bold 
measures, inaction is not a possibility. That's not the issue on the table. 
Action will be taken. The question is, which action? Is the action pouring 
more money into the banks without any effect on lending, increasing the 
deficit, which the President talked about, or the actions which could be 
taken, starting on new banks, looking forward rather than looking to the 
past, significant financial restructuring? 

Are we going to bail out the shareholders, bail out the bankers, rather than 
focusing on saving the systemically important parts of these institutions? 
There are some important parts of these institutions that we'll have to 
save. The question is, are you going to go do it like with a bludgeon, throw 
money at it, or are you going to try to do it more surgically and save the 
parts that need to be saved? And one of the things that went wrong is when 
we went-let Lehman Brothers go. It caused this enormous trauma. And that's 
increased the fear about-but that's an example of doing things wrong. We 
didn't ask the question. There was a systemically important part of Lehman 
Brothers. 

AMY GOODMAN: Which was? 

JOSEPH STIGLITZ: Which were the commercial paper that was part of the money 
market funds that were-people were using like banks, like part of our basic 
payment mechanism. We could have saved that part and let the gambling part 
of Lehman Brothers, which is not part of the payment mechanism, go down. And 
because we took this blunt approach, we failed. And what the financial 
markets are doing are saying, "You have to save everything, if you're going 
to save anything." And that's just wrong. 

AMY GOODMAN: Tomorrow, President Obama is going to announce plans to cut the 
deficit in half. Do you think that's the right way to go? 

JOSEPH STIGLITZ: What we have to remember is we are in for almost like-most 
likely a long and extended downturn. Now, we will eventually recover. That's 
not a question. But in 2011, 2012, will we be in a sharp recovery or in a 
more slow recovery? 

One of the lessons from Japan was that in 1997, when they were in the 
beginning of their recovery, they increased taxes because they wanted to get 
rid of their deficit, and the economy sank down back into a downturn. 

The way to look at it is the following. Right now, in 2009, 2010, we're 
talking about, per year, something like a stimulus bill of $350 billion per 
year. To cut the deficit in half, with a deficit as we go into-without the 
stimulus is one-and-a-half trillion dollars, so we're talking about pulling 
out $600, $700, $750 billion. That's the reverse of an expenditure, taking 
out the stimulus and cutting back expenditures by another $600 billion-we're 
talking about a turnaround of a trillion dollars. Do you really believe that 
by 2010, by 2011, 2012, our economic recovery will be so strong that it can 
withstand that kind of taking out of expenditure? I don't think so. And so, 
if you went ahead and did that, we will go back into a downturn. 

AMY GOODMAN: Joe Stiglitz, you co-wrote The Three Trillion Dollar War: The 
True Cost of the Iraq Conflict. Talk about the effect of war on the economic 
crisis. And now we're not only talking about Iraq. But your thoughts on 
increasing the number of troops, intensifying the war in Afghanistan? 

JOSEPH STIGLITZ: Well, first, let me say, one of-the President did have two 
things that I really welcome. And several of the suggestions that we made in 
our book, he has adopted. For instance, in the past, under the Bush 
administration, the war was totally funded by-or almost totally funded by 
emergency appropriations. It was as if every year was a surprise. And he 
said he's going to put that on the books so that we can evaluate it, make 
sure their money is going in the best possible way. 

A second thing in our book that was, you know, really-was really, I found, 
very moving was the way we treat our veterans is terrible. And he said, you 
know, they fought for us; we have to fully fund the Veterans Administration. 
So those were really important moves in the right direction. 

But on the other side, the move into Afghanistan is going to be very 
expensive. Things are not going very well. Our European-those who-NATO 
partners are getting disillusioned with the war. I talked to a lot of the 
people in Europe, and they really feel this is a quagmire, we're going into 
another quagmire. And one of the things that we do talk about in our book is 
that if you keep a residual force in Iraq, it's going to be very expensive. 
That's the experience that Britain has had. They've kept a relatively few 
troops, and the result of that is the savings that they had hoped weren't 
materialized. So that goes back to the part that he talked about at the end 
of his speech: the deficit. If you're going to be spending all this money in 
Afghanistan and in Iraq, that deficit is just going to be that much greater. 

AMY GOODMAN: So you think Obama is wrong on Afghanistan? 

JOSEPH STIGLITZ: I think so. 

AMY GOODMAN: Have you told him? Have you been talking to him? 

JOSEPH STIGLITZ: Not on that issue. 

AMY GOODMAN: You've been talking to him, though? 

JOSEPH STIGLITZ: During the primary and the period afterwards in some 
discussions about what to do with the banks. There were discussions. The- 

AMY GOODMAN: Meaning you talked to him- 

JOSEPH STIGLITZ: Yeah. 

AMY GOODMAN: -on the telephone. 

JOSEPH STIGLITZ: Yeah. 

AMY GOODMAN: I wanted to get your response-after President Obama spoke, the 
Louisiana Governor Bobby Jindal gave the Republican Party's official 
response. He blasted President Obama's stimulus bill as an irresponsible 
piece of legislation. 

  GOV. BOBBY JINDAL: Democratic leaders in Washington, they place their hope 
in the federal government. We place our hope in you, the American people. In 
the end, it comes down to an honest and fundamental disagreement about the 
proper role of government. We oppose the national Democratic view that says 
the way to strengthen our country is to increase dependence on government. 
We believe the way to strengthen our country is to restrain spending in 
Washington, to empower individuals and small businesses to grow our economy 
and to create jobs. 

AMY GOODMAN: Louisiana Governor Jindal. Your response, Joe Stiglitz? 

JOSEPH STIGLITZ: I wish he had taken an economics course. The fact is that 
when the economy is weak, as it is, you need to stimulate aggregate demand. 
If you don't do that, the economy gets weaker. And what's good about most of 
Obama's plan is that it's creating assets. So, while the liabilities go 
up-we're going to have to borrow-we also are creating assets. If we had 
spent a few billion dollars under the beginning of the Bush administration 
on the levees in New Orleans, we would not have had to spend so much money 
in the cleanup, in dealing with the devastation that it brought. That would 
have been money that would have had an enormous return. $5 billion would 
have saved $150 billion. And so, that's an example where there are certain 
kinds of investments-investments in technology, investments in people-that 
the private sector can't do and the government can do in ways that give us a 
very high return. 

AMY GOODMAN: Joe Stiglitz, very briefly, the whole issue of 
globalization-we're 
in the tenth anniversary of the mass protests in Seattle, the Battle of 
Seattle. What about the questions raised in corporate-led globalization? 

JOSEPH STIGLITZ: Well, I think two very important issues. One of them is the 
model that was behind much of the impetus for that globalization was a model 
based on free unfettered markets. And we know that model, deregulation, has 
failed. That was the kind of thinking that led into the problems the United 
States is in today. 

The second point is that while we talk about free and open markets, what the 
United States has been doing has destroyed a level playing field and will 
have profound implications for the evolution of globalization going forward. 

AMY GOODMAN: And for developing countries? 

JOSEPH STIGLITZ: And for developing countries, it's having a devastating 
effect. I mean, just a couple days ago, the other American banks were 
complaining about the huge subsidies that were given to Citibank. They say, 
"How can we compete when the government is subsidizing Citibank to that 
extent?" Now, if you think these other American banks that have gotten 
massive subsidies are complaining, you can imagine the kind of feelings that 
people have in developing countries that say, "We can't afford those 
mega-subsidies. How can we compete against Washington being able to write a 
check any time anything goes wrong?" 

AMY GOODMAN: And healthcare? He's called for universal healthcare, but he 
does not call for single-payer healthcare. 

JOSEPH STIGLITZ: I think that there are some fundamental problems in the 
efficiency of our healthcare system. And what we've seen is that the private 
healthcare insurers do not know how to deliver an efficient way. 

AMY GOODMAN: Do you support single-payer healthcare? 

JOSEPH STIGLITZ: I think I've reluctantly come to the view that it's the 
only alternative. You know, we've tried a lot of other things. And we've 
been-you know, I was in the Clinton administration, and we debated a lot of 
alternatives, and I've watched things as they've emerged and, you know, 
evolved over the last twelve, sixteen years, and I think there's a growing 
consensus that the private market exclusion is not going to work. 

AMY GOODMAN: Joe Stiglitz, I want to thank you for being with us, the Nobel 
Prize-winning economist, professor at Columbia University, co-author of The 
Three Trillion Dollar War: The True Cost of the Iraq Conflict. 

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