Professor Joseph Stiglitz has won two Nobel Prizes, taught at the finest schools in the world, and is one of the most highly regarded economic minds in the world. Perhaps it is exactly this intellectual firepower causing his "very depressed state of mind" when he considers the state of the American economy.
The professor joined me and my Daily Ticker colleague Aaron Task, simultaneously honoring us with his presence, bumming us out with his forecast, and giving us hope for a solution; even though his best-case scenario is the United States flat-lining like the Japanese "Lost Generation." How could he not be glum these days?
For starters, we can't get out if we don't know how we got into this mess. Stiglitz says the matter started at the top. "The problem was the economic downturn, the crisis, was much worse than the Obama Administration wanted to own up to." And in his view the stimulus was too small, too brief, had too many tax cuts, and too few drivers of economic growth. I would've pointed out that the Administration was passionate about the sorry state of affairs to the extent the President could blame his predecessor, but that would seem argumentative.
Fiscal policy didn't cure our economic woes, so Aaron and I inquired about the role of Ben Bernanke and his merry crew, which was meeting at the time of our conversation. Can the Fed help break the economic slump?
An emphatic "no," responded the normally loquacious Stiglitz. Failed monetary policy of the past was one of the causes of our current problems and stimulus from the Fed has done what it can. Short-term rates are de minimis and real interest rates are negative, a stance which isn't going to change until at least 2013.
Big corporations are awash with cash, notes the Noble Laureate, but small companies, the real drivers of employment, can't get loans. Substantial changes to the banking system which would force banks to make loans by in effect, penalizing them for keeping cash on the books, could be the answer. But this is unlikely to make it through the current Congress.
The subsequent statement from the Fed represents an effort to do exactly that at the monetary level. Real interest rates are even more negative than they were yesterday morning. Holding cash comes with a cost. Will this lead banks to get cash off their books by lending it to the small businesses that need it? That's up to the elected officials. The Fed has done what it can, their "hands are tied," as our esteemed guest said.
Mine is not to summarize the words of someone like Joseph Stiglitz. If you read this far your homework is to watch the video and tell us what you think of Professor Stiglitz's ideas in the comment section below.
- monetary policy
- Ben Bernanke
- Fiscal policy
- interest rates
- de minimis