MANAGING GLOBALIZATION
Dealing with the global crisis
Last week, readers of the Managing Globalization blog submitted questions to Joseph Stiglitz, the Nobel-winning former chief economist of the World Bank and former chair of the White House's Council of Economic Advisers who now teaches at Columbia University. An excerpt of the exchange appears below; the entirety will be posted on the blog.
How long do you expect the current crisis to last, and what will its effects be on developing countries?
There is a growing consensus among economists that this is going to be the deepest and longest downturn in the last quarter century, and almost surely, since the Great Depression. (Direct comparisons between numbers - e.g., unemployment rates - may not be meaningful because of the change in the structure of the economy, away from manufacturing toward the service sector.)
I always thought that the idea that there could be decoupling of the American economy from the rest of the world was a myth. The world has become too interconnected. Developing countries have benefits from being able to export large quantities to the advanced industrial countries, and their growth has, in many instances, been fueled by investments from those countries. But that means when there is a downturn in the advanced industrial countries, they will be affected.
Who was at fault for the crisis? Who was asleep at the switch? Could more monitoring have averted the problem?
This is a man-made crisis. It didn't have to happen. It was the result of macroeconomic policies in the United States - in particular, a tax cut for the rich which did not stimulate the economy - combined with the Iraq war, which led to soaring oil prices. These put the burden of keeping the economy going on monetary policy. The Federal Reserve responded in a shortsighted way: It provided ample credit with low interest rates. Combined with lax regulations, it was an explosive mixture, and it exploded.
The administration and the Fed were remarkably slow in seeing the problem coming, and when they did, they responded at first inadequately, and then with panic. The stimulus package passed in February predictably failed to stimulate. The administration again thought that a tax cut was an all- purpose cure to any ill, but in the circumstances, with a heavy burden of debt and an uncertain future, Americans saved most of the money.
The Fed and Treasury veered recklessly in their bailout strategies, bailing out some, not others, demanding harsh terms on some, not on others. They have made what would in any case have been difficult even worse. For those of us who had lived through the East Asia crisis, the decision not to bail out Lehman Brothers brought memories of the mismanagement of the Indonesian crisis. There, the International Monetary Fund (under the influence of the U.S. Treasury) shut down 16 banks, made it clear that there were more to follow, wouldn't say which ones, but made it clear that there would be at most only limited deposit insurance. They succeeded in killing the private banking system; the next day there was panic.
What's the best way to solve the problems of the crisis, in the short and long terms? Keynesian fiscal measures? Aid for individual investors?
Government has to take strong actions. If we don't, the downturn will get worse. It might recover in the long run - but in the long run, we are all dead. No one, not even President George W. Bush, thinks doing nothing is the right action. Unfortunately, the actions taken by the Bush administration, while very costly, have not been very effective.
The Bush administration has been relying on a massive blood transfusion to a patient dying from internal hemorrhaging; nothing is being done to stem the wave of foreclosures. Already millions of Americans have lost their homes, and millions more will in coming months. We have a human tragedy, not just an economic crisis. We need to put in place strong and effective policies, such as bankruptcy reform and aid to low-income households for home ownership. Beyond that, we need a strong fiscal stimulus. Given the huge legacy of debt being left by Bush, some are asking, can we afford it? The answer is, we cannot afford not to do it.
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