Leave it to Joseph Stiglitz to get to the radical truth of the global financial crisis. This time he was the main speaker for the United Nations University "Thinking on Global Issues Lecture Series." The title of his talk was, "Explaining the Financial Crisis and What it means for the Future of Global Development."
Stiglitz is professor of economics at Columbia University an 2001 Nobel Laureate in Economics. He contributes to the work of the UNU World Institute for Development Economics Reseearch [UNU-WIDER] in the field of global development. He also chairs the Chair of the Commission of Experts of the President of United Nations General Assembly on the Reforms of the Internatioinal Monetary and Fianncial Systems, established in 2008. [See previous report on their meeting]
The UN University is a rather new innovation of the UN. It is based in Tokyo, Japan with satellites around the world.
For this talk, the UNU had to go beyond its normal presentation arena, which usually takes place at the 174 seat Dag Hammarskjold Auditorium. Conference Room 2 was used for the overflow. A total of over 1,000 registered for the lecture. It was the topic, but also, Stiglitz has the reputation of telling the truth about global economic issues, that brought everyone out.
Stiglitz developed the case for there being 2 crises. The first one being the Financial Crisis, which came from the US Bubble; the consumption boom; banks broken; and, it is still unraveling.
The second crisis is the crises for macroeconomics.
For the first crisis he said the obvious that many did very well. And, it is these same people who did very well who will resist any real regulation of the financial systems. "They don't want real reform." They say we should be careful "to not overreact." They call up the routine arguments of the danger to "innovation" with too much regulation.
But, the truth is that with their big profits, Stiglitz said, there was not much innovation.
"The Financial system is a means to an end; Not the ends itself." That was his reoccurring theme.
He said that there are deeper problems in the financial system. He said that all the incentives in the banking system were the wrong incentives. It lead to banks becoming too large to fail.
He said that the financial system will probably be corrected in the next few years, but the deep problems, which created the crisis, will remain.
Japan in 1997-98
He made several references to the economic crisis that took place in Japan in the 1990s, especially in 1997-98.
That crisis should have warned all of that all countries are integrated in the global economic system. And, that there are strong global imbalances in that integration.
Built Up Reserves
One thing that took place in the 1990s was a revolt against the International Monetary Fund, which Stiglitz was a main economist for a number of years. He said that with that crisis, many countries refused to go along with the IMF dictates. This was a good thing in one way. This led many countries to hold quite large reserves. While this was good for those countries, the system around them was built on a different premise.
This lead to an "Insufficient Aggregate Demand." [For more on this concept, go to Stiglitz's former speeches on the subject.]
Macro Economic Crisis
Stiglitz then talked about the second crisis, "The growing inequality all over the world." He referred back to the countries that balked at the IMF demand for deregulation and those kinds of reforms. But, some countries had to go in that direction. And, that has deepened the crisis.
He said that the new "Global Integrated Economy must get healthy for the U.S. economy to recover."
He targeted the IMF for still pursuing failed policies.
He said that many of the reforms being pursued will not help developing countries. He cited the new US Economic Package. He gave mild support to it, as something in the direction that needs to take place. But, he pointed out that the "Buy America" plan will honor the trade agreement in place, which means those with the EU countries; and, not the developing countries. This again discriminates against development countries.
Stiglitz gave the following random recommendation to the assembly "students:"
The old Market ideas of the past decades must not be used to go to the future;
There must be local reserve system reform;
A NEW CREDIT FACILITY is need. The IMF cannot do that job. It would take too long for it to reform itself to be of any use;
We need a new global architecture…A new Breton Woods. The past 60 years has shown that the ideology of the market place is too flawed to continue. The 1997-98 crisis should have warned us; now we must go a different way.
Note: In his speech, he didn't articulate what the new road should be. He said that he is working with [he is actually the leader] a UN group to formulate that new road. That is the President of General Assembly Commission on Experts. That should be ready soon.