Risky business

Joseph Stiglitz was awarded the Nobel Prize in economics in 2001. Under US President Bill Clinton he served as chairman of the Council of Economic Advisers from 1995- 1997. He was chief economist of the World Bank from 1997-2000 and was a lead author of the 1995 Report of the Intergovernmental Panel on Climate Change, which shared the 2007 Nobel Peace Prize. He currently chairs the UN Commission on Reforms of the International Monetary and Financial System and is professor at Columbia University in New York.

DW-WORLD: Last week's UN conference on the economic crisis, where the recommendations of the so-called Stiglitz commission were presented, wasn't attended by any leader of the G8 countries and has been largely viewed as a failure. What would you tell the heads of the G8 countries who collectively chose not to come to New York?

Joseph Stiglitz: I think I would tell them that it was a missed opportunity. This crisis has badly affected many of the developing countries for which they have some culpability because it was mistakes in macroeconomic policy and regulations of the advanced industrial countries that resulted in the global crisis. The discussion at the meeting highlighted the very reason why I think it is important to have participation from the other 192 countries that were not in the G8 or not even in the G20.

Instead of travelling to the recent UN meeting, the G8 will hold its own summit next week in Italy where the economic crisis will of course be a dominant topic. German Chancellor Angela Merkel and US President Barack Obama said last week at a joint press conference that they are making good progress in dealing with the global crisis and in establishing tougher rules for the financial system. Are they right?

It depends on what you mean by good progress. They are making progress absolutely and one certainly shouldn't understimate the progress that has been made.

But part of the reason that things look better is that things were really bad last fall and some of the things like the freezing of the credit markets have been dealt with and the credit market has been unfrozen. And that is an important step forward.

The critical questions though are: Are we on the verge of a robust recovery? Have we undertaken the kinds of regulatory reforms to make it unlikely that we will have another crisis such as this again? And I think one has to answer those two questions and say: No, we are nowhere near a robust recovery.

The fact that growth is becoming positive is obviously necessary, but not sufficient as we know from the long period of the Japanese malaise. Yes, there will be some cosmetic reforms in the financial sector regulations, but the real question is whether they will be deep enough. And the unwillingness of some of the G8 to really attack issues like secrecy of derivates, attack issues like the to big-to-fail banks, means that we have a ways to go yet.

What are the most urgent economic steps that need to be decided by the G8 Summit?

One of the issues that I think is very very critical and that was highlighted in the UN meeting was giving grants to the poorest countries and not just loans. The problem is that many of the poorest countries have just emerged from a period of excessive debt burden. And they don't want to see themselves again facing a problem of excess debt. So it is absolutely essential that something is done to provide them with grants and not only money to be disbursed through the IMF who has a lack of confidence in many of these countries, but through other mechanisms of disbursements of funds.

You have been chairman of the UN Commission to reform the international financial system for a year now and with your colleagues have made wide ranging recommendations. Given the stance of the major industrial countries, do you think that any of your recommendations stand any realistic chance to get implemented?

I think all of them have a reasonable chance to get implemented eventually. The question is when. And one of the points of our commission was to say we have to get back to the task of making globalization work.

This crisis shows that there are two sides of globalization. It has facilitated in the past some positive things. It has enhanced the ability of some countries to grow. But it also has a negative side. It has facilitated a crisis that orginated in the United States and then spread all over the world. If we don't manage globalization better there will be a retreat from globalization. So anybody that is committed to globalization has to be committed to beginning a process of adressing these issues.

German Chancellor Merkel, who faces a general election this fall, has vowed to cut taxes despite a massive budget deficit, saying it will stimulate growth and motivate people. As far as the German economy is concerned, which is also in a deep downturn, do you think that tax cuts make sense?

I would be very careful about tax cuts at this juncture. As a way of stimulating the economy I would certainly focus more of my energy and attention on high-yield investments in research, technology, education, infrastructure and green investments. In general, that's a better way of focusing public resources because as you create a liability, you are also creating an asset and if we had a good accounting framework we would actually see that the public position was strengthening.

Have we seen the worst of the economic crisis yet and could it be that after all is said and done, the financial system will be largely unchanged and everything will simply go to back to business as usual?

I think there is a reasonable risk that we will have another epsiode with very serious consequences. We are certainly not out of the woods yet. There is some chance that we will muddle our way through, not to a robust recovery anytime soon, but more likely into a Japanese style malaise.

In the United States, which I know more closely, we have problems in our commercial real estate sector, in our non-sub-prime real estate sector, in our credit cards, in our insurance sector, in our commercial loans. We have a vast array of problems which will come into the fore in the coming months. We may manage our way through all these difficulties. But one of the reasons we can't be sure is that our banks have very bad accounting frameworks with a lot of non-transparency. And they worked hard to make it difficult for us to assess where things are going. So we are left in the position of not being sure.

To the other question, whether it is likely that we will emerge from the crisis and just go back to business as usual. I think the banks would very much like us to go back to the world as it was before 2007. The fact of the matter is that that is not very likely. At least in the United States and Britain, the financial sector was bloated. We confused means with ends. I think there will be more care going foreward.

But we have to admit that the financial sector has done a remarkable job at resisting some of the regulatory reforms that are needed. That's not a surprise, given the amount of campaign contributions and the amount of lobbying that they have done, five lobbyists, according to some studies, per congressman.

So the real risk, I think, is that things will be even worse before the crisis. The reason I say that is the way that we have gone about rescuing the banks and restructuring our financial sector has resulted in the too-big-to-fail banks becoming even bigger.

Yes, the banks will be chastised for a while, they will be a little cautious for a while, but unless we make the regulatory reforms clearly in a few years time all this will be a memory and we will back to the horse races. That, I think, is a very serious concern.

Interview: Michael Knigge
Editor: Trinity Hartman