One on One with Nobel Laureate Economist Joseph Stiglitz
Wednesday, April 22, 2009
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SUSIE GHARIB: Treasury Secretary Timothy Geithner reassured investors and the country today that the foundation is being laid for an economic recovery. Speaking to economists in Washington, Geithner defended plans to partner with the private sector to buy up bad bank loans and other toxic assets. Geithner called the economy the worst in modern times, but suggested there are some reasons for optimism.
TIMOTHY GEITHNER, TREASURY SECRETARY: The rate of decline in global growth and trade has shown some signs of easing. Some measures of spending and output have started to stabilize. Financial conditions are starting to improve modestly. You are seeing some thawing in credit markets. And we started to see some signs of stabilization as I said, in declines in output and trade and these are encouraging signs, but I want to underscore that progress is going to take time.
GHARIB: Not everyone supports Treasury's plan to deal with those bad bank loans including Joseph Stiglitz, the Nobel laureate economist. Earlier today I met with him at his office at Columbia University where he talked about his ideas on fixing the banking system. But first, I asked him for his take on how the economy is doing.
JOSEPH STIGLITZ, ECONOMICS PROFESSOR, COLUMBIA UNIVERSITY: It's possibly doing better than it was at the very worst. But that's not doing well and that doesn't mean we are really firmly on the road to recovery.
GHARIB: So Professor Stiglitz, when do you see the recession ending?
STIGLITZ: Recession is normally defined as negative growth and so the question of when the negative growth, the fall will stop, that could happen by the end of the year. But that's not a statement saying that we're going back to full employment, that we're going to be back at where we were. I don't see that happening for at least a couple years.
GHARIB: There are a lot of mixed reports on the banking sector. Treasury says most banks are doing OK. Others say that many of the big banks are in real financial trouble. What kind of shape is the banking sector really in?
STIGLITZ: I'm worried. I'm worried because we know that the real estate market is continuing to get weaker. It's going from sub prime to prime to residential to commercial. We know that as the economy gets weaker, you always are going to have an increase in defaults and other categories of loans and we see that already. Student loan defaults going up. Credit card loan defaults going up. Business loan defaults going up. So, you know, the bad news is just beginning because the economic downturn is just beginning to hit with full force.
GHARIB: You've said that the Treasury's public-private partnership to buy toxic assets from the banks is a terrible deal for tax payers. Why is that?
STIGLITZ: It's a peculiar kind of partnership. We put it in 92 percent of the money. The private sector puts in 8 percent but the private sector gets to keep 50 percent of the profits and we take, the tax payer, most of the losses. It's just not a fair deal no matter how it look at it.
GHARIB: So do you believe in letting the banks fail or nationalization? What's the alternative?
STIGLITZ: We've made a few elementary confusions. Too big to fail is not the same as too big to be financially restructured. We engage in financial restructuring of corporations all the time. The bank continues but you make the shareholders lose their values. The bond holders may or may not take a haircut as the expression goes. In other words, they may make some losses. Because of the turmoil in our financial markets, the government may have to put in more money. But in return for that, we get appropriate shares and we get appropriate control.
GHARIB: Is there any one thing that you would like President Obama to do or not to do in fixing the economy?
STIGLITZ: Well, I think that the things that need to be done I think are all on the agenda. But they have to be done in a different way. First, you need a more effective stimulus, a larger stimulus. Secondly, we need to do something about the mortgages, not just helping those at the bottom who are having a great deal of time making their payments but also the millions of homeowners who see the value of their mortgages exceeding the value of the homes. We have to write down the principal. And most importantly we have to address the problem that banking system and the kind of way that I describe going through the usual processes of conservatorship and over the longer run, I think we have to break up the banks that are too big to fail.
GHARIB: Professor Stiglitz, thank you so much for talking to NIGHTLY BUSINESS REPORT.
STIGLITZ: Nice to be here.
