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Nobel laureate-economist says the U.S. has conditions for another great depression, but is far more aware of what needs to be done. (2:52)
 

Full interview. (13:47)
 

Tavis: As we wrap this very difficult week for Wall Street and the U.S. economy, I'm pleased to be joined tonight by Joseph Stiglitz, winner of the 2001 Nobel Prize in Economics. His most recent book is called "The Three Trillion Dollar War: The True Cost of the Iraq Conflict," the book available in paperback on Monday. Joseph Stiglitz, what an honor to have you on the program.

Joseph Stiglitz: Nice to be here.

Tavis: Nice to have you here, sir. Before I get into the book, if you wouldn't mind indulging me?

Stiglitz: (Laughter) Sure.

Tavis: With a few question about a story you might have heard about this week?

Stiglitz: Exciting week (laughter).

Tavis: That had to do with our economy. No laughing matter here. Before I ask any particulars, just give me your take on what this week has meant? How do you read this week?

Stiglitz: Well, it's the culmination. I won't say the end point, but the thing started going bad in August of 2007. It's sort of like a slow-moving train wreck. Last April and May, a number of people in the administration and Wall Street said that they saw the light at the end of the tunnel. It was a light of a freight train coming at us.

They thought it was the end and I thought that things were just going to continue to unravel, that the underlying forces, housing prices going down, more foreclosures, more defaults. You can see the whole process going on, so you can't predict when the whole thing is gonna fall apart. But the likelihood that an event of this kind was going to happen seemed pretty clear.

What I find so amazing is that they didn't see this coming back in 2004, 2005 and 2006. There was a kind of complacency. Alan Greenspan was asked, "Is there a bubble?" He said, "A little froth in the economy. If there's a problem, we can take care of it." Well, when he said we can take care of it, he didn't say we can take care of it with billions and billions and billions of American taxpayer money.

Tavis: You're much closer than I am as an economist and as a Nobel Laureate, no less. What's your sense of how this is casting a new light, or for that matter, casting aspersion on Greenspan?

I ask that because you're the first person that's raised that in conversation with me. He was the guy, as long as he was there, who was regarded in very significant ways. I mean, it's always true for the Fed chairman, but when Greenspan spoke, people really listened --

Stiglitz: - he was called "The Maestro."

Tavis: There you go. "The Maestro." If Warren Buffet is the Oracle, this guy, you know, is the Maestro. How is this now reflecting on him, do you think?

Stiglitz: Oh, I think everybody now realizes that people were asleep at the wheel, including him. He was in charge. More than asleep at the wheel, he and the Fed were largely responsible in two senses, what they did and what they didn't do. What they did, they let loose a political liquidity. What they didn't do, they didn't regulate. Not surprising, because he was put in that position by Reagan because he didn't believe in regulation.

Remember his predecessor was Paul Volcker. Did a fantastic job fighting inflation. You would have thought, given the job he had done fighting inflation, that he would have been given multiple stars, asked to stay on. But no, because Volcker understood the role of regulation in the financial system.

Greenspan was committed to deregulation or what is sometimes called self-regulation, which is an oxymoron, and what we're getting is the outcome of that. So I would put more emphasis actually not on the person, but on the philosophy behind the person.

We've had this kind of market fundamentalism, this idea that markets are self-correcting, that Wall Street is at the pinnacle, they understand that, none of this welfare programs. Now we see that they're all in favor of corporate welfare. They were totally against regulation. They were against then, but now when things are falling apart, they're taking all the money.

When I see those numbers, what I think of is a few months ago when the president vetoed a program for health insurance for uninsured poor children. If they don't get healthcare, they're gonna be scarred for life. He said, "We can't afford it." We're talking about a few billions of dollars and a big national debate.

Tavis: That's a long list. You can put New Orleans on that list. We could do this all day and never have time to get into the book.

Stiglitz: When you see, though, that we said we can't afford that, then somehow when Wall Street needs the money and they need a bail-out - and it's not really a bail-out for economy. It's a bail-out for a lot of these investors.

Tavis: What's your read on the government? Because I was surprised, quite frankly - maybe I shouldn't have been - but I was surprised at the AIG bail-out by the government in part because not that I should believe everything the government says, but they had been so adamant.

You know, the industry has got to find a solution and they wouldn't bail out Lehman Brothers. I mean, they said, "We're not going to do this. We're not bailing anybody else out. You guys in the industry got to find a solution." They called this big meeting of everybody and then I wake up the next morning and AIG has been bailed out.

Stiglitz: It's a totally inconsistent battle. We bail out one, we bail out another, we bail out another, we don't bail out you, we bail out somebody else.

Tavis: Right.

Stiglitz: We used to think we got a government of rules. We thought we had a government of laws; we had a government that was transparent. None of that is true today. We don't know why, we still don't know how much we as taxpayers are at risk from the Bear Stearns and that was last March.

Tavis: Let me ask you to that point now what's your sense? You're right. We don't know in detail. What's your sense of how this fallout impacts the everyday American?

Stiglitz: Well, the way it's going to impact is really about to come because the reason the financial system is so important to our economy is that everybody requires credit. You want to buy a house, you need credit. A company needs credit to keep going.

As the banking system gets weaker, its balance sheet gets weaker, it's gonna contract on lending. As it contracts on lending, everything slows down until the time it takes for those balance sheets to get restored and then the economy will recover. So we will recover, but we're just at the beginning of the slow-down of the American economy.

Tavis: So the worst hasn't happened as yet?

Stiglitz: No, no. We're far from it.

Tavis: Far from it?

Stiglitz: Far from it.

Tavis: Wow.

Stiglitz: So I think, in terms of where the ordinary American is going to see coming, of course, it depends in part on what other kinds of action the government does, what kind of stimulus packages. You know, some people say, "Are we going into another Great Depression?" My response is very simple. We know enough. Monetary fiscal policy, we have the tools to stop another Great Depression, absolutely.

On the other hand, we've seen enormous incompetence from this administration and actually from a previous administration in other places. So, for instance, we had the tools to stop Indonesia from going into a deep depression in the island of Java in 1998 when they had their crisis. Unemployment got up to forty percent. We had the tools to stop it, but the U.S. Treasury at that time and the IMF proposed policies that led to those bad outcomes. That could happen.

Tavis: Let me complicate this more then. Your book now out in paperback, "The Three Trillion Dollar War: The True Cost of the Iraq Conflict" - conflict is a good word. How does this conflict in Iraq complicate the situation that the economy is already in? You ain't got to be a Nobel Laureate, with all due respect, to understand if we're spending billions and trillions of dollars over here and you're bailing out folk over here, this all has an impact on the economy.

Stiglitz: Yeah. As Everett Dirksen said, "A billion here, a billion there, and pretty soon you're talking about real money." We're now talking trillion here and trillion there and pretty soon you're talking about real money. Well, one of the big points we make in the book is that there aren't two issues in this election. There's actually one issue. The war and the economy are actually very closely linked. I think you put it exactly right. One of the ways in which the two are linked is that our room for maneuver is reduced.

We didn't do what we should have done back in February when the economy needed a stimulus. It needed a strong stimulus, clearer now, but most economists understood at that time. Why didn't we have a stronger stimulus? Well, go back to our last downturn in 2001. At that point, we had a two percent of GDP surplus. I mean, we had a lot of money to spend. We didn't spend it well, but that gave us a lot of room to maneuver to energize the economy.

Well, today largely because of the war, but not exclusively because of the war, we have a huge deficit. In fact, this is the first war in American history that has been totally financed on the credit card. You know, usually you go to war, you send your sons and daughters to fight, making the sacrifice, risking their lives, and the rest of us have some sense of shared sacrifice. We're too old to fight, but we sacrifice by paying taxes. This president told us to go to the shopping mall (laughter).

We already had a deficit when we went to war and then he had a tax cut. The result of that is that, you know, this year or next year, we're gonna see the largest deficit that we've ever had and that means we have less scope for doing what we need to do. You know, we're piling up debt that our children and grandchildren will be paying.

In the year 2001 when the president became the president, our national debt was $5.7 trillion dollars. At the end of this administration, it will be well over $9 trillion dollars if we don't include Fannie Mae and Freddie Mac. But the independent and nonpartisan Congressional Budget Office have said, "Look, it's part of the national debt." Their debt, okay, once we took it over. So our total debt will be approaching $15 trillion dollars.

Tavis: Let me ask this as a quick exit question. I've got about a minute to go here. You'll get my point here. I don't want people to send me hate mail. Does it really then matter who the next president is on economic policy? I ask that with this as the back story.

To your point, if the debt is that high, the deficit is that high, if the maneuverability, to your point, is so limited, aren't both of them caught in the same situation? And if the maneuverability is that little, I mean, does it really matter what we're hearing from what who is going to do to get us out of this mess?

Stiglitz: They're both gonna face a difficult situation, absolutely.

Tavis: Right.

Stiglitz: But there is a difference.

Tavis: Okay.

Stiglitz: The difference is a set of priorities, a set of priorities in a couple of different ways. One of them is how fast do we get out? Because this war is using up more than $12 billion dollars a month up front, but more than forty percent are coming back disabled, so we're gonna have bills to pay for decades to come. We estimate $600 billion dollars just to pay disability benefits and healthcare for the returning disabled veterans. That's not even included in our current national debt.

Now the longer we're there, the more those bills keep coming in. The question is, what are we getting for it? I think we're actually undermining our security because, when you look at it, Iraq is a small little piece of earth. We might get stability there. I don't think we are, but even if we got stability there, what about Pakistan, Afghanistan? Even the U.S. Army is saying things are going worse than they have ever gone in Afghanistan.

Tavis: My time is up. I want to make sure that I'm hearing you correctly. What I hear you saying is that how long we stay in Iraq, whether McCain or Obama wins, how long we stay in Iraq has a direct impact on how long we're gonna be in the mess that we're in now where the economy is concerned.

Stiglitz: Very much so. The two are very closely linked.

Tavis: I got it. Joseph Stiglitz, winner of the Nobel Prize in Economics. He ought to know this stuff and indeed he does. The book is called "The Three Trillion Dollar War: The True Cost of the Iraq Conflict." Mr. Stiglitz, nice to have you on.

Stiglitz: Nice to be here.

Tavis: All the best to you.