Joseph Stiglitz

Published May 7, 2012, 4:00 AM

This week on Here’s The Thing, Alec talks about the financial crisis with Joseph Stiglitz, a Nobel Prize-winning economist. Stiglitz shows no restraint when unleashing criticism of presidential policies -- on both sides. Of President Barack Obama’s financial-industry rescue plan, Stiglitz said that whomever designed it was "either in the pocket of the banks or … incompetent." Stiglitz talks to Alec about growing up in Gary, Indiana and how that impacted his decision to become an economist.

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This is Alec Baldwin and you're listening to Here's the thing. I don't know about you, but I never read the business pages of a newspaper before I was forty five. Then something changed My interest in banking, financial markets, technology and its effects on our lives. My whole view of the role of economics shifted. Today it's the first section I go to in my own case, It's the New York Times because I have questions, lots of questions. Roughly three years along from the economic meltdown that still affects us all, I made a call to Dr Joseph Stiglitz at Columbia University. Dr stiglets is a rare contradiction, a Nobel Prize winning economist who speaks in plain English. He's a renowned expert on taxation, trade, and development who would also be good company at a ballgame. Presidents continually turned to him for guidance. Under Clinton, he chaired the Council of Economic Advisors from five but he shows no restraint when unleashing criticism of their policies. Of President Obama's financial rescue plan, Stigletz said that whomever designed it was quote either in the pocket of the banks or incompetent unquote. Stiglets was the chief economist at the World Bank for three years until January two thousand, when he resigned in protest over the bank's policies. He wanted more transparency at the Bank and felt that the money doled out shouldn't have so many strings attached. Joseph Stigletz gets around. He's lectured all over the world and taught at Yale, Stanford, Duke, Oxford, and Princeton. I met him at his office at Columbia University, where he's taught since two thousand and coming here today, I was reminded of why they have orientation weeks at colleges, where you spend the first week just finding where all your classes are. It was like an assure print getting here to your office today. With Stiglets, you're in no need of an orientation, even if you're talking about the financial crisis. Joseph Stiglitz calls them like he sees them. Where both Bush and Obama made a fundamental mistake is they didn't distinguish between saving the banks and saving the bankers and the bank's shareholders and bondholders. It was both an economic and I think a political mistake, because what Americans saw was that hundreds of billions of dollars were going into save the bankers, their shareholders, and their bondholders without any constraint on how that money was going to be used, paid out in dividends, paid out in bonuses. Do you think that because of the urgency, do you forgive them and say there wasn't time where they should have known that there should be less discretion for the banks to distribute the money as they saw fit. I think there was no excuse for what they did. The UK did a much better job in terms of playing by the rules of the game after we did. They did it roughly at the same time, and either there's a fundamentally different mindset about investment banking over there. What was quite remarkable is that in the UK banking was even more important than it was in the United States, but the government there had a greater sensitivity about what needed to be done, so their view was just like in the United States. The argument was we needed to keep the flow of money lending going if we're going to keep the economy. And that was what was so absurd about what both the Bush and Obroma administrations did. They gave money to the banks to recapitalized, to lend, but then they said, by the way, you don't have to use that money to recapitalize and land. You can use that money to pay dividends or to pay bonuses. The question is was there something else they could have done? There were many other things they could have done. One of the things they could have done is in giving money to the banks, they could have said, you have to continue lending, especially to small and medium sized enterprises, and not use the money to pay out bonuses or to pay dividings. The second thing they could have done, the banks would have done a response to that, what would they have said? I think the banks had no choices. What prevented them from going to the banks and saying, we're going to give you seven hundred billion dollars or whatever the figure was initially, and we're gonna give you this money and you are forbidden from using more than a certain percentage of it for distribution in bonuses and in shareholder dividends. Why don't you think they did that? Very simple politics? Uh, they got a lot of money, and who do you think was the person that was was it Paulson? Was the one who was telling when your estimation, well, I unrestricted money. I think it was a broad consensus between Paulson, Bernanke, and Geitner, who was the head of the New York fat which was playing a pivotal role because it was the big banks in New York were still in Bush's term and it's the first bailout, and Bernanke and Geitner are predisposed to this as well. Exactly why do you think why? I think they panicked, and I think they brought into the mindset and the arguments of the banks. Not a surprise that the bankers tried to instill fear. But how does someone instill fear? How do bankers to say, if you don't give us this money unrestricted, this is what's going to happen. What's going to happen? The fear, I think was that the banks would never be able to get private money, people would leave banking. Now, to me, it was pretty clear where the bankers going to go, especially as the economy goes into a downturn. It wasn't as if there was a lot of offers for these guys who have brought the economy to the brink of room it didn't look good. And you're talking about private money, so you're saying, if you don't give us this money unrestricted, so for that shareholders can be rewarded. Shareholders will view this as a very very bear market in a bare environment, and you won't be able to raise additional money, and to keep the banking system going, you'll need more public money and that's going to be very difficult. Do you find that on Wall Street? Because what this sounds to me like that there really is just this kind of generic sense of an administration, of an sec of a white house in a treasury department that are Wall Street friendly and those that are not Wall Street friendly. And what defines Wall Street friendly is you just don't tell us what to do. We completely run our own shop, and you just stay out of it. That's right. We're the experts. Don't mess with us because we're vital to the economy. If you get us upset, they're like a terrorist with a bomb strapped around their body. If I go down, your all going down. You see it in in so many different contexts, for instincts. When A I G was bailed out to the tune of a hundred and fifty billion, dollars. A critical point in that bailout was that a I g. The government brought back the derivatives and they paid for those derivatives on the dollar. They didn't want to say where the money was going. Eventually pressure was put on the Fed to tell where the money went. The largest recipient was Goldman Sacks. There are other instincts is with the banks did in the process of foreclosure, the robo signing where they were signing ALFI David's that they had inspected the records and that these people deserved to be thrown out of their houses because they owed money they had not. We basically had a banking system where writing mortgages, the banks and the lenders didn't care whether you could pay or not. But because once they made those loans and those loans crapped out, they believed what the government was going to step in email m What was actually worse than that because they were engaged in predatory lending and discriminatory lending. So it wasn't just that they didn't care. They went after the poorest, at least financially sophisticated Americans, and they tried to move the money from the bottom of the pyramid to the top in a way that was unconscionable. When the bank shift to, as you said, both predatory and discriminatory lending, having a market which a wholesale number of people default on their mortgages. What were the banks hoping for in that market that they created, which was that the god from what would swoop in and bail them out? A couple of interesting aspects of their strategy. One was this financial development called securitization. So it used to be there. When banks wrote a mortgage, they hold onto it, and because they hold onto it, they wanted to make sure it worked well. But once they started selling them, once they started securitizing, selling them to others, their object was simply to write a product that others would buy. So when the sale by the banks, by the mortgage lending institution, by the securitization of those things, when did that start? Well, the process really began in the early nineties. I wrote an article in around anticipating that this whole securitization was going to end in disaster and saying that they were going to underestimate the probabilities. Is the thing You've won your greatest number of awards for but it was it was interesting to see the extent that I had to anticipated what what had actually happened. Namely, they underestimated the likelihood the prices will go down. The models they rating agencies were using assume that prices never go down, when in fact you look around the world you see they often do go down. Let's stop there to about the rating agencies, you must be a profound critic of the ranging the rating agencies believed. You might say, in financial alchemy, you take a bundle of mortgages that should have been F rated, and you put them together, and you convert bad mortgages into an A rating security, but you dilute them. That that was I can't have a whole bundle of all f and coll and A can you. Well that's what they did. So they took what was homogeneously bad bundle, well not all bad, but there were a very large fraction of bad and and what happened was that these bundles collapsed. The rating agencies are they serve at the behest of who The rating agencies are paid by the investment banks. So it's like playing in the NFL and the ref won't throw the flag because the ref isn't working for the league. The ref is working for some ref work for each team. For each team, they had incentives that we now know Districkler to distort the facts to give a ratings. Uh. They helped the banks design products that met the minimal standards that were Where do people turn for an unbiased rating of a securities? Though? Where do they go? That's the fundamental problem that information on the kinds of securities that arise out of the securitization process is very difficult to get unbiased information, And there's a quandary. If the producer of the securities the investment banks pay, you can't trust the rating agencies. But it's very hard to get the consumer to pay because one investor might pay, but then that information can spread to others, and it's hard to create a viable business model that will provide the finance for the supply of information. Does any arm of the government have any legal authority over the rating agencies to force them to adjust their standards and to adjust their methodology. The answer is no. UH. They've tried to claim that it's just a matter of free speech. My own view is that there needs to be more accountability than that this is Alec Baldwin. You're listening to Here's the thing more in a minute. This is Alec Baldwin, and I'm talking with Joseph Stigletz, Nobel Prize winning economist, professor, and author. We met in his office at Columbia University. He spent a good part of his career advising world leaders on economic issues. But Joseph Stigletz is no stranger to the world of academia. I went to MS colleague as an undergraduate. I began studying physics. I just love the elegants the mathematics, but sometimes in my junior year I decided that my real passion was economics. I had grown up in Gary, Indiana, which was in some ways an amazing industrial town in the southern shores of Lake Michigan. It was founded by U. S. Steel as the largest integrated steel mill in the world in nineteen o six, and it typified in many ways America of the twentieth centiartland America, and you saw both the strengths but also some of the weaknesses. So as I was growing up very aware of very serious poverty, the economic system didn't always work well. We had episodic and appointment business cycles. You could see around you lots of crimination, and it just didn't seem like a system that was working. Um, it was working for some, but not working for an awful lot of people. So in my junior year in college, I decided I wasn't going to become a physicist. I was going to be an economist. I went to my advisors. They said, you should go to M I T. And so I went to M I T. And began doing work trying to understand why markets often didn't work as well as those people who said the markets were working perfectly. Uh, free free markets, people like the University of Chicago economists who talk about Freedman. Freedman. I grown up and I had seen the markets were not perfect, But I want to know why they weren't, what was wrong with our analysis with their arguments. But then I very quickly started working into one specific issue that turned out to be very important. What are the consequences of imperfect information and so obvious ones related to what happened in the recent crisis. It was the presence of imperfect information that allowed the banks to take advantage of others. No, no, when you say this idea of imperfect information. Do you think that the system has grown and has evolved so quickly over the last let's say, twenty years, that the government can't keep up to the Goldman's sexes of the world and do all the most I don't want to say predatory, but the most veloci raptor esque investment banking houses who just are devouring profits and just devouring equity. Is it because the government just can't keep up with them. No, I could have done a much much better job. So you believe that's a profound statement. You believe the government could have prevented much of what happened. It could have prevented much of what happened, saying that in hindsight, at the time, they knew there were steps they could have taken. In particularly, there were people even on the FED that warned them. Ned Gramlick, he was on the board of the FED, and he said, something wrong is going on in the mortgage market in terms of the securitization problem. The problem was that you had that they had fed some people who believe that markets always worked, that there weren't such things as bubbles. The most people in your field, the most sophisticated, most knowledgeable minds and economics today. Do you find many of them view these bubbles like people in California view the San Francisco earthquake. That's a total anomaly. What happened in the twenties would never happen again. As we get towards oh seven away, no matter how the the house was shaking, they said, it's not going to be like again. If you look at the history of capitalism, there have been bubbles, panics, and bubbles that broke repeatedly. With each bubble, they look at the past and say, oh, those guys were very stupid. We're smarter, And of course that was true. In the last bubble, they believed that it was not a bubble because bubbles were a thing of the past. We are smart people, we don't have bubbles. But in fact, the telltale signs that there was a bubble were there for anybody who wanted to look at them, and there were instruments that were there to anyone who wanted us to tame the bubble, like raising the down payments. What does Vulcan saying that you agree with or not. I think Bolger is one of the heroes of this story. Um Vulgar realized that financial markets needed to be regulated, and that was one of the reasons that Reagan looked for somebody to replace him. After all, in terms of what central bankers normally are graded on, he had brought down double digit inflation down to very low levels, and that would normally have been rewarded by a reappointment, but he was dismissed. When Reagan comes in, people view this as this watershed in that area, that about smashing government regulation. What did reagonomics mean to people? Throw that word around like it's this magic dust. You know, what did Reagonomics mean to you then? And what does Reaganomics mean to you now? Is a Reagonomics as perhaps another act in a long standing battle about the appropriate balance between markets and government. And Reagan came in and try to put his hand on one side of that balance and say, let's get rid of government, let's just let markets rip. Why do you think I think it was just ordinary greed, the belief that we got rid of the regulations and all the cree could make more money. There was one other argument that in a way shows the naivety of their reasoning. In the decades after Glass Steagle, which was this law that separated investment banking from commercial banking, that had tried to put restraints that avoiding some of the conflicts of interest that had marked the past. In those decades after the passage of these whole series of laws and the Great Depression, the country had been remarkably stable. There had not been a financial crisis. And because there had not made a financial crisis, they made the wrong inference. They said, financial crisis are a thing of the past. But they were a thing of the past only because we had the regulators. So once you repealed Glass Eagle, once you got rid of the regulations, once you started going into deregulation, you started having crisis after crisis. Do you think we should be institute class to Eagle or a modification thereof something new. What is clear is that we need to have stronger regulation. The vocal rule is one way of doing it. How would you characterize the vocal rule for people who don't know what happens. The vulgar rule is a restriction that says banks are supposed to be serving their customers, not making money for their own portfolio. So it's an attempt to say you can't engage in what are called proprietary trading, trading on your own behalf gambling against your customers in the way that Goldman Sachs did. It just opens up such a can of worms that it's very difficult for government to stop it once you open up that possibility. Barney Frank, what did you make of what happened with him, with Freddie Mack and Fannie man With what the issues were that people were contending about Frank and what he did? A couple of points. One, He and the Democrats more generally were very instrumental in ninety four giving the FED scope for regulating better. They were more pro regulations, and had they had the Fed implemented the regulations that they had the authority to implement, we would have avoided the crisis, at least the worst parts of it. There's a very large controversy over the rule of Fannie Mae and Freddie mac in the current crisis. In my own mind, there shouldn't be any controversy. The evidence is overwhelming that they were a late comer to the problems and basically a side show. The fundamental problems were created by the private banks in their subprime fraudulent predatory practices. The if you go in your mind, they don't deserve to be lumped into the same categories. Definitely, if you look at their default rakes, their problem rakes, they performed far better than the private sector. Now, after they collapsed, the government began to use Fannie Mae and Freddie Mack in part to bail out the private banks and to buy bad portfolios and so forth, and they became part of the resolution mechanism trans fery money from the public sector to the private sector. So you can't look at some of the things that have happened after the government took them over and the collapse of two thousand and eight to make inferences about the kinds of lending they were doing before. Now you have been out of the government since two thousand correct, I've actually been out of government six I was in the World Bank from do you miss that world? Think about going back to where it's been a long time now. It's very exciting. It's both frustrating and satisfying. Really difficult problems shaping public policy, figuring out what to do, then persuading others. Because we live in a democratic society, I can't just decide what I think is the right thing. I have to persuade others. This idea that government officials work nine to five is absurd. We had our first meeting at seven am, and I had to prepare all kinds of work before that, So that meant you had to get up at five am, and we had meetings that would go on to midnight. If you went back into the political sphere, would you do things differently? Do you think you would have approached your work differently? In hindsight, Actually, I feel reasonably satisfied about what I did with the battles I fought, uh I thought against the deregulation of the financial sector, and when I was there, we did not repealed Glass Steagle. I guess I would have hoped I would have been more successful, and some of the battles you always wish you could have done more. So you you come back into academia and have students changed. One of the things that I think that has changed certainly since I was a gradual student is that there are overall fewer of the very best students to go into academia into public service. One of the major miss allocations of the financial sector is the misallocation of our scarcest resource our young people, and many of them could not resist the temptation of these outsized bonuses. Many of them went in thinking that they would work for a few years, make their fortune, and then do what they want. So they'd rather be Lloyd blank find than Joseph Stickles, many of them, and in terms of in terms of the career path, unfortunately, I think a disproportionate number. I don't think they think of it as Lloyd blank blank find. But I think the thractions of the lure of money was irresistible and still today but more guarded because more of them see the problems of the financial sector, more are aware that money doesn't buy happiness, and they want to feel good about their lives and what they do. Do you see yourself in that room? Sometimes? Um, I find that there are a few students who have that kind of deep curiosity, a few that have a real commitment to help our society, help developing countries. Would I find also extraordinary disturbing is the kind of you might call I don't want to say fear, but the worry are they going to get good jobs? Are they going to get promotions? Does the economics profession care about the things they care about. So when you draw that line from the young men and in Gary, Indiana, who was fascinated by whole quilted nature of the economy in his own hometown and then went to Amherst, I thought he wanted to go into physics, went to m I t went into economics. When that man wins the Nobel Prize for economics for that very thinking, how did you feel? Well, obviously I felt very very pleased. I think one of the things though, that as you study things, you understand how complex things are, how much more there is to understand. The other thing, I guess which has been might say the frustration is well, I think there's been these enormous advances in economic science, in our understanding of the ways markets don't work, our public policy, our ability to persuade the population in general to move policies, and persistent with these four implement and four in some ways we've been moving to disconnect. There's a disconnect. The period in which the free market ideas gained the upper hand in the United States, beginning in Reagan, was exactly the period when economic science was explaining why free markets didn't work, just as we were making real strikes forward and understanding the limitations of markets were the boat in the opposite direction exactly, and and the increasing difficulty of getting the politics to move in that. But as you said, the great challenge for you have the work you did, was you said to sell these ideas to people and the democracy. You have to do that. I mean, I can know the answer, but unless I can persuade others, it doesn't do any good. I believe very strongly that that if we're going to win in this battle that I had begun when I was a young person at Amherst, one has to persuade others that these are real problems the way of market, they are urgent, and that we have answers, maybe not perfect answers, but answers, but things that we could do to make things a lot better. M. Joseph Stiglitz has written more than twenty books, including the forthcoming The Price of Inequality, How today's divided society endangers our future. You can find more information on our website. Here's the thing dot org you're listening to. Here's the thing. I'm Alec Baldwin

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