http://www.vanityfair.com/politics/features/2008/11/stiglitz200811
Reversal of Fortune
Describing how ideology, special-interest pressure, populist politics,
and sheer incompetence have left the U.S. economy on life support, the
author puts forth a clear, commonsense plan to reverse the Bush-era
follies and regain America’s economic sanity.
by Joseph E. Stiglitz November 2008
When the American economy enters a downturn, you often hear the experts
debating whether it is likely to be V-shaped (short and sharp) or
U-shaped (longer but milder). Today, the American economy may be
entering a downturn that is best described as L-shaped. It is in a very
low place indeed, and likely to remain there for some time to come.
Virtually all the indicators look grim. Inflation is running at an
annual rate of nearly 6 percent, its highest level in 17 years.
Unemployment stands at 6 percent; there has been no net job growth in
the private sector for almost a year. Housing prices have fallen faster
than at any time in memory—in Florida and California, by 30 percent or
more. Banks are reporting record losses, only months after their
executives walked off with record bonuses as their reward. President
Bush inherited a $128 billion budget surplus from Bill Clinton; this
year the federal government announced the second-largest budget deficit
ever reported. During the eight years of the Bush administration, the
national debt has increased by more than 65 percent, to nearly $10
trillion (to which the debts of Freddie Mac and Fannie Mae should now be
added, according to the Congressional Budget Office). Meanwhile, we are
saddled with the cost of two wars. The price tag for the one in Iraq
alone will, by my estimate, ultimately exceed $3 trillion.
This tangled knot of problems will be difficult to unravel. Standard
prescriptions call for raising interest rates when confronted with
inflation, just as standard prescriptions call for lowering interest
rates when confronted with an economic downturn. How do you do both at
the same time? Not in the way that some politicians have proposed. With
gasoline prices at all-time highs, John McCain has called for a rollback
of gas taxes. But that would lead to more gas consumption, raise the
price of gas further, increase our dependence on foreign oil, and expand
our already massive trade deficit. The expanding deficit would in turn
force the U.S. to continue borrowing gargantuan sums from abroad, making
us even more indebted. At the same time, the higher imports of oil and
petroleum-based products would lead to a weaker dollar, fueling
inflationary pressures.
Millions of Americans are losing their homes. (Already, some 3.6 million
have done so since the subprime-mortgage crisis began.) This social
catastrophe has severe economic effects. The banks and other financial
institutions that own these mortgages face stunning reverses; a few,
such as Bear Stearns, have already gone belly-up. To prevent America’s
$5.2 trillion home financiers, Fannie Mae and Freddie Mac, from
following suit, Congress authorized a blank check to cover their losses,
but even that generosity failed to do the trick. Now the administration
has taken over the two entities completely, a stunning feat for a
supposedly market-oriented regime. These bailouts contribute to growing
deficits in the short run, and to perverse incentives in the long run.
Market economies work only when there is a system of accountability, but
C.E.O.’s, investors, and creditors are walking away with billions, while
American taxpayers are being asked to pick up the tab. (Freddie Mac’s
chairman, Richard Syron, earned $14.5 million in 2007. Fannie Mae’s
C.E.O., Daniel Mudd, earned $14.2 million that same year.) We’re looking
at a new form of public-private partnership, one in which the public
shoulders all the risk, and the private sector gets all the profit.
While the Bush administration preaches responsibility, the words are
addressed only to the less well-off. The administration talks about the
impact of “moral hazard” on the poor “speculator” who borrowed money and
bought a house beyond his ability to pay. But moral hazard somehow isn’t
an issue when it comes to the high-stakes speculators in corporate
boardrooms.
(clip)
_______________________________________________
pen-l mailing list
[email protected]
https://lists.csuchico.edu/mailman/listinfo/pen-l
