State of the Union

"the country is now immersed in a "doomsday cycle" wherein banks use borrowed money to take massive risks in an attempt to pay big dividends to shareholders and big bonuses to management -- and when the risks go wrong, the banks receive taxpayer bailouts from the government"

-Matthew Jaffe, Common Dreams

Joseph Stiglitz- The economist who cried wolf

American economist Joseph Stiglitz has warned us before, and he's doing it again. Listen.

As interviewed by Larry Elliott of The Guardian

Feb,12,2010

Joseph Stiglitz feels depressed. Having been a voice in the wilderness urging caution when financial capitalism was in a speculative frenzy, he wants the crisis to be the catalyst for radical thinking. But he fears it won't be: Greece is being forced to cut its deficit, the bankers are behaving as if nothing has changed since August 2007, and the political running in the United States is being made by the right-wing anti-state Tea Party.

"There was a moment of euphoria when we were all Keynesians," he said in an interview to mark the publication of his new book.* "Those ideas were working and every government stood behind them. It was not just Keynesian macro-economic policies, it was the need for regulation and the recognition that economics had failed."

Since those heady days of optimism a year ago, when unprecedented government action hauled the global economy back from the brink of a new Depression, Stiglitz says two things have happened to derail prospects of change. "Plans to re-regulate the financial markets have run into a political quagmire and there has been a resurgence of deficit fetishism."

He says he is surprised at how fast the forces in favour of the pre-2007 status quo have re-grouped. "The optimist in me is hopeful we won't need another crisis to finally motivate the political process," he said. "The pessimist in me says it may need to happen."

Pessimistic

Now 67, Stiglitz has been a critic of the Chicago School of free-market economics and its international cousin – the Washington consensus – throughout his career. His trenchant objections to the deflationary policies imposed on Asian countries by the International Monetary Fund in the late 1990s led to him being ousted as the World Bank's chief economist after lobbying from Bill Clinton's treasury secretary, Larry Summers. (Stiglitz's nemesis is now head of Barack Obama's National Economic Council.)Since then, he has written books on the defects in globalisation, the 1990s boom, the cost of the Iraq war and now on the Great Recession. Freefall attacks all his familiar betes noires: the IMF, the US treasury, the Federal Reserve, Wall Street, the mainstream economics profession and, of course, Summers.

Stiglitz is a "big supporter" of Obama's plans to stop Wall Street banks speculating with customers' money. Significantly, the initiative only happened when the president stopped listening to Summers, treasury secretary Tim Geithner and Federal Reserve chairman Ben Bernanke, and turned to the veteran policy-maker Paul Volcker.

"I'm pretty pessimistic about the US. It will be a long time before unemploy­ment returns to normal." He believes the struggling housing market – 25% of households are in negative equity – may harm one of America's traditional strengths: the ability of workers to move from state to state in search of jobs. He says US banks are hiding their exposure to commercial real estate, which he fears will be the next problem.

He says the pick-up in growth across the global economy in the latter half of 2009 will not last. "The likelihood that growth will slow is close to 100%. The likelihood that it will drop below zero is uncertain. We don't know about the policy response, we don't know whether there will be a second stimulus package in the US, and we don't know how bad the balance sheets of the banks are."

For the past couple of weeks, Stiglitz has been advising the Greek government on how to respond to its severe financial crisis. He says the speculators are not basing their decisions on what they think but are gambling on what they think other people will think about Greece. "They are gambling on the degree of irrationality going forward."

Europe, he says, should show "social solidarity": the European Central Bank provides liquidity to solvent banks to help them through the bad times, and should treat Greece in the same fashion. "If the central bank is prepared to provide liquidity support for banks it should be able to provide it for countries."

He added: "Governments had to come in after the banks mismanaged what they were supposed to do. The financial markets are now criticising countries for picking up the pieces after the financial markets failed. They are demanding the wages of workers be cut but bonuses be allowed to continue. This is an absurd situation."

The crisis has exposed a fault line in the single currency. From the outset, critics said the test of the euro would be when the poorer countries came under pressure and lacked the ability both to devalue and to access financial support from the richer parts of the euro area. "That problem was swept under the rug but has now come to the fore."

Stiglitz has long been a supporter of a financial transaction tax, the brainchild of his fellow American Keynesian James Tobin. This week a coalition of groups launched a campaign for a "Robin Hood tax" that would levy a small charge on financial transactions and re-distribute the proceeds. "A transaction tax is designed to tackle high-frequency activity for which it is hard to find any societal benefit," Stiglitz said.

"The only questions about a financial transaction tax are: can it be effectively implemented and can it be circumven­ted? There is a growing consensus that it can be implemented, if not perfectly then effectively enough to make a difference." Speculators themselves supported the idea of the tax because they knew their activities were "socially counter-productive", he claimed.

Wrinkles

Stiglitz won his Nobel prize for his work on asymmetric information, the notion that markets do not work as perfectly as textbooks suggest. "It is almost impossible to reconcile the description of the economy provided by the mainstream profession and what has actually been going on. These are not minor wrinkles."They acted as if the bubble would go on forever, when real incomes were falling for most Americans."

He says attempts by Tony Blair and Gordon Brown to knock some of the rough edges off of Thatcherism "didn't go far enough" in correcting the Thatcher revolution. "In trying not to over-react they under-reacted."

George Osborne is precisely the sort of "deficit fetishist" Stiglitz has in his sights. Incredulous at the idea that the Conservatives would cut spending when the economy is barely out of recession, he thinks Osborne would take a different view in power. "He originally talked about big deficit cuts but seems to have backed off that in terms of timing. The reason they are doing that is that if they did it the recession would get much worse. If they get elected, they will move from rhetoric to reality."

In the years ahead, Stiglitz says the big story will be the challenge to the west from China and India. There was a time when emerging economies had no choice but to accept the free-market policies imposed by Washington. "The US treasury would be laughed out of town if it went to China or India today and told them they had to de-regulate.

"We can now see a day when the dominance of the west will end."

Further wise words can be found in Stiglitz' latest book Freefall: Free Markets and the Sinking of the Global Economy

 

Geographies of the Financial Crisis

GEOGRAPHIES OF THE FINANCIAL CRISIS

by Manuel Aalbers

The article "Geographies of the Financial Crisis" looks at the geographical aspects of the global financial crisis, in order to provide a better understanding of its causes and consequences. Mortgage lenders, being key players in the financial crisis and discussed, beginning with the transition from local to national mortgage lending . After the S& L crisis of the 1980s, borrowers and investors alike were wary that there weren't enough options available. S&L markets evolved to satisfy this need. This first transition was rationalized by the proposal that spreading the risk amassed by Savings & Loans institutions would not only allow for loans to be distributed to a larger population, but would also reduce interest rates on the loans. The transition from national S& L markets to national financial markets in general, or Securitization was initiated by Fannie Mae and Freddie Mac in the 1960s, on the basis that connecting S & Ls to other markets would allow for more funds to be garnered and used as loans.

As non-bank lenders entered in the markets, there grew a demand for low-risk investments, which mortgages were purported to be ,and the number of mortgage loans offered increased as the requirements for application relaxed. Mortgages loans were marketed as not just low-risk, but high-return investments, resulting in underestimated risk and overestimated returns on the markets. Globalization and financialization of mortgage markets was underway but the consequences ere yet to be seen as they hidden under the bubble. The article gives an example of the effect on small municipalities around the globe, by discussing Narvik, Norway, a town with a population of only $18,000. The city council was advised to invest in an RMBS securities compiled by a US lender (Citigroup) and the crisis has cost the city council almost all of a $78 million investment. While this may not be too large a loss for larger investors, the loss has been critical for the city of Narvik, which has had to cancel plans on infrastructure and left the city council unable to pay civil servants.

The boom of the 2000s brought sub-prime lending and adjustable rate mortgages (ARMs)both of which were wrongfully marketed and whose risk was grossly understated to investors. The article states that with housing prices declining by 10%, about half of the $1 trillion in ARMs subject to resetting in 2007 would drop to negative equity. Although not discussed in detail, the article points out that there is factual evidence to the defense that regulation and deregulation not only enabled, but stimulated securitization and sub-prime lending. Just as important, some American states which attempted to pass tougher predatory lending laws were blocked by federal agencies. The geography of mortgage lending delves deeper into predatory lending, a subset of sub prime lending that the authors have observed as targeted towards low-income, unsophisticated, and minority populations.

Higher percentages of loans were deemed predatory in areas with minority populations as compared to predominantly white areas. The most important observation about the financialization in regards to national geography is that " Decades of financial deregulation have not resulted in wider access to mainstream financial services, but in a two-tier banking system with mainstream finance in most places next to a landscape of financial exclusion and predatory lending where banking services and the number of bank accounts have declined and fringe banking (pawn shops, payday lenders etc.) and predatory lending flourishes"(38).

Changes in the global geography are visible as of the wave of M& A(mergers and acquisitions) in the spring of 2008. Those banks that have gotten bigger represent a larger portion of the financial map and could reveal new primary and secondary financial centers worldwide. In contrast to history, these new financial centers are likely to be located outside of North America, although the two largest (New York and London) don’t seem to threatened to a large extent. Ultimately, the impact of the global financial crisis has been arguably more adverse on non-financial institutions. Deregulation, subprime and predatory lending have led to a new topographical image of the global financial map. In fact the authors state that "globalization has come full circle" due to the increasing investment in US financial markets by foreign investors, often in undeveloped countries.

While it is factual that foreign investments have grown immensely, I do not believe that we can state ' globalization has come full circle' until other aspects of globalization reverse themselves as well. This article only shows the financial aspect, and albeit large, the social and cultural aspects are yet to show reversal. The Western and most developed countries still continue to show dominance in social and cultural globalization.

Journal compilation © Royal Geographical Society
Area Vol. 41 No. 1, pp. 34–42, 2009