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Tuesday, September 30, 2008

Dr. Joseph Stiglitz - Ron Garmon

CityBeat: You’ve been asked this today I’m sure, but how much of this week’s ongoing economic disaster can be traced to the war?
Joseph Stiglitz: It’s clearly played an important role in two important respects. First, I think the war had a lot to do with the increase in the price of oil. There could be debate about how much, but even if it’s only responsible for 30 percent, 40 percent, the chain of logic is that with the price of oil climbing, Americans were spending more money abroad. The Fed responded in what I’d say was a shortsighted way to the weakness of the economy by keeping interest rates lower, lending standards lower, and it’s precisely those lower rates, the flood of liquidity and the lower regulatory standards, which led to the current problem. Now, I think that you could argue it may in fact be the war that broke the camel’s back. The system has an enormous amount of resilience, so it can take a certain amount of abuse. People can gamble and it can survive. The second way, very important, goes back to 2001; when we had our economic downturn, we had a surplus of two percent GDP. It became clear in August 2007 something needed to be done, but they didn’t get around to it until February 2008. What it did was very mild and it was mild because we were constrained by a very big budget deficit. Even Bush’s advisor – now Fed Chairman – [Ben] Bernanke identified this as a main difference between 2001 and 2008.

Yes. The Clinton surplus, now gone.
Yes. It was still extant at that time. Now, in 2009, we’ll be looking at the largest deficit in our history.

Lordy. Give us the bad news, as if that wasn’t bad enough. Can a major and long-lasting world recession be far behind?
Um. Well. Um. [Long pause, as the professor makes a mildly discomfited face.] Economists are always two-handed, so I’ll be a two-handed economist. On the one hand, in many ways, this current financial meltdown, which is just beginning, is more complicated yet not so serious as the Great Depression – yet could easily become so. But the real consequences have been much milder. The Great Depression saw 25 percent unemployment. Most economists would say we now know how to combat that through Keynesian measures and there’s no need for us to wind up in that situation. That’s probably what’s behind some of the extraordinary events this week: the government going into the insurance business, the mortgage business, the government becoming the largest insurer, the largest mortgage company. Talk about socialism, we have it! It’s an irony the biggest increase in the role of government in the economy would happen this way.


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