JS: They didn’t want to notice it. And they didn’t want to notice it for two reasons. One was this absurd notion that if you can just keep the markets optimistic — be a cheerleader — the economy will keep going strong. The normal hope at Fed and Treasury is that you will be viewed as a great economic leader because you cheered the economy on. So political leaders start acting like cheerleaders and not as economic analysts, which is dangerous.
But the deeper problem is that our public officials – the Bush administration and the Federal Reserve – were very wedded to a particular ideology that could not conceive that the markets were not efficient. They actually argued that there was no such thing as a bubble, or that even if there was, you couldn’t tell when it was happening. They actually argued that it was less expensive to clean up the mess afterward than to try to interfere with the magic of the market. It was crazy, but that made it intellectually easy to dismiss all the smart people who were talking about the housing bubble.
But of course, underneath all of that is the third reason. Lots of money was flowing to lots of people who were friends of these politicians. And no one wants to be a party pooper when so many people that they knew were making so much money. And so they were under pressure to keep the party going. But they weren’t deceiving the American people in a sense, in that they actually, I think, believed what they were saying, which is all the more worrisome. Their role as cheerleaders, their ideology, their view that their friends were so smart and deserved to get all this money because it was making the economy go – all these went together and served as blinders on their eyes. And unfortunately, those same blinders have impeded a design of an effective response.
ZC: It’s interesting to see similarities between the Obama administration’s response and that of the Bush administration.
JS: Well, some of this is bipartisan. Wall Street is bipartisan. There are people in both parties that believed in deregulation. There were people in both parties that were making a lot of money. But there is a difference. The critics of the deregulation philosophy were much more vocal within the Democratic Party. When I was in the Clinton administration, there were several of us that were raising these issues very strongly. We didn’t win out in the end, but there was at least a very vocal debate on the economic philosophy.
ZC: Can you go into that a little bit more? I think people are broadly aware of the conflict between Robert Reich and Robert Rubin on the budget deficit, but what was actually discussed when you were on the Clinton team?
JS: Well, the very issue that you were talking about before. The repeal of Glass-Steagall was one of those issues that was debated very extensively. And I described this in my book Freefall, that we had this big debate and I can say that I feel pleased that while I remained chairman of the Counsel of Economic Advisors the Glass-Steagall Act wasn’t approved, but I think it had more to do with Congressional politics than politics within the administration. The Treasury wanted it. Bob Rubin wanted it. And one can understand why.
ZC: He made a lot of money working at Citigroup after the repeal.
JS: I think there was genuine belief in this doctrine of deregulation, that markets could take care of themselves. Greenspan in his famous Congressional testimony, his mea culpa, he said that he thought banks could manage risk far better than they did. But what he didn’t point out was that if I mismanage my risk, there are consequences for me and my family, but when a major bank mismanages risks, there are consequences for the entire economy. So it’s not just an issue of risk management, it’s an issue of catastrophic externalities. You shouldn’t allow a bank to put the entire economy at risk.
ZC: But the debate is still all about regulating banks as private sector, for-profit companies. Given the clear public purpose that banks serve, why don’t we just make finance a public utility?
JS: There are actually several problems that carry a long history with governments trying to run banks. In many countries, they have not done it very well because of the potential politicization of the lending process. And that’s why I’m actually fairly supportive of the approach that we took in the years after the Great Depression where we had private banks, strong incentives, but we made sure that they don’t engage in excessive risk-taking, that they were regulated to serve the public purpose so that we try to shape their behavior. This public/private interaction that I think has worked most effectively.
There is no one today who believes the government should not be involved in finance. Even the bankers acknowledge this when they ask for bailouts, and they’re also very protective of the Federal Reserve system. There would be no mortgage market today without the government. What we need to do is find the right balance, the right kind of government involvement in finance, because right now we clearly don’t have that. And the bankers are doing everything they can to keep the balance out of whack.
ZC: Will we get it right?
JS: There’s no question that we’ll get it wrong, the question is how wrong we will get it. Right now, I am not very optimistic. We lost the political moment. Something will happen, it will have substance, but I worry that it will still be more cosmetic than substantive. (Posted by Bulatlat.com)
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 is an economics editor at AlterNet. He writes a weekly blog on the economy for the Media Consortium and his work has appeared in the Nation, Mother Jones, the American Prospect and Salon.