Joseph Stiglitz: Bankers Made Reckless Bets on the Economy, Knowing Taxpayers Were Going to Pick up the Tab
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Nobel Prize-winning economist Joseph Stiglitz has served as the Chairman of President Bill Clinton's Council of Economic Advisers and Chief Economist for the World Bank. He has been a persistent critic of free-market economics, whose recent book Freefall: America, Free Markets, and the Sinking of the World Economy(W. W. Norton & Co., 2010) traces the roots of the financial crisis and details the government's flawed response. Dr. Stiglitz discussed the crash of '08 in an interview with AlterNet economics editor Zach Carter.
Zach Carter: How did we get here?
Joseph Stiglitz: Well, there are so many pieces that contributed to our getting here that it's hard to distill into something simple, but the bottom line is that the banks acted recklessly in their lending, in their gambling, in their management of risk. They made bad judgments about credit worthiness. In a sense, they failed their core societal function of allocating capital and managing risk. They misallocated capital and they mismanaged the risk. What I tried to do with the book is peel back the onion and ask – this is not the way capitalism supposed to work – why did things happen so badly? And here there are a number of factors. One of them was that the bankers had the incentive to engage in short-sighted behavior and excessive risk-taking. You have to ask, "Why is that?" And the answer has to do with problems of corporate governance and a host of other problems that I try to delineate in the book.
On the other side, though, they were allowed to get away with it. And here the issue was deregulation. We stripped away the regulations that had worked so well in the quarter century before 1980. We'd known about the potential for these problems for decades and we had figured out how to stop them, but then we stripped away those regulations. Then you have to ask why we did that, and it had to do with the ideology and with financial interests. The bankers wanted to be unrestrained and they painted the political process, shaped it to make sure they could get away with it. The economists provided some arguments for why it would be a good thing.
ZC: I want to focus on that word 'capitalism.' A lot of people who are advocates of financial reform are being described as ' populist' or ' socialist.' But it seems to me that one of the core thrusts of your book is that the system we had in place in the mid-'70s was a good system, and nobody was screaming about our socialist banking system at that time. What do you make of the current debate over the banks?
JS: What we have now is not real capitalism. I give it the name "ersatz capitalism" because what we're doing is socializing losses and privatizing gains. That's worse than real capitalism, of course, because it means that there are distorted incentives. So the banks can write these credit default swaps and crazy derivatives knowing that if things go bad, the taxpayer is going to pick up the tab. So the first point I want to make is that today's system is not real capitalism. It's gambling at the expense of the taxpayers.
The other point that I would make is about the use of the word "populism," which is used in a number of different ways. One meaning of populism is a government that responds to the concerns of the people. Of course, that is what democracy is supposed to be about, so reformers shouldn't worry about being labeled populist in that sense. But the other use of the word is much more negative in tone, and it describes a situation where political leaders promise things that are beyond the laws of economics.