Joseph Stiglitz is in town

Joseph Stiglitz is half way through a lecture tour of Australia. Unfortunately he’s already been to Perth and Brisbane and it’s too late for Melbourne, but there is still Hobart, Canberra and Sydney where public lectures are scheduled.

If you look at his bio, he knows a bit about the GFC because:

In 2009 he was appointed by the President of the United Nations General Assembly as chair of the Commission of Experts on Reform of the International Financial and Monetary System, which also released its report in September 2009.

Many will have seen his interview with Kerry O’Brien on the 7.30 Report. If you think the global financial system has been fixed Stiglitz has some disturbing messages for us. Here are some excerpts.

KERRY O’BRIEN: Can the whole thing happen again?

JOSEPH STIGLITZ: It can and it almost surely will happen again, because we didn’t deal with the problem of too-big-to-fail banks. It is one of the reasons why it will happen again.

KERRY O’BRIEN: In your view, how close did the global financial system genuinely come to a collapse?

JOSEPH STIGLITZ: That’s a good question, and I think it actually came very close to a collapse, and by that I mean the following. The various banks knew that they didn’t know their own balance sheet.

KERRY O’BRIEN: What you’re saying is that the entire financial system was flying blind.

JOSEPH STIGLITZ: Exactly.

O’Brien raised the question of waste incurred in the Australian stimulus package.

JOSEPH STIGLITZ: If you hadn’t spent the money, there would have been waste. The waste would have been the fact that the economy would have been weak, there would have been a gap between what the economy could have produced and what it actually produced – that’s waste. You would have had high unemployment, you would have had capital assets not fully utilised – that’s waste.

To concentrate on the local for a moment, I’ve been reading Shitstorm: Inside Labor’s Darkest Days by Lenore Taylor and David Uren, a book finished just before Rudd’s demise. Taylor and Uren say that in all the Rudd government committed $75 billion to fiscal stimulus. It worked, saving some 350,000 jobs, but at a price. The price included an 18-month period mid-term that was devoted largely to managing the GFC and committing funds that effectively hijacked their agenda, not just for the first term but the second term also as the stimulus commitments roll out through to 2011-2012.

Lenore Taylor in conversation with Richard Fidler says that Rudd was the bravest of all the gang of four in making sure the fiscal stimulus was large enough. Part of the price may have been his political career.

The electorate, having been saved from the crisis, have experienced close to BAU. Stiglitz is not saying that we’ll get the double dip anytime soon. His tip is for a ‘Japanese-style’ recovery, a long period of low growth. He says that Obama has over-promised in saying that the banks won’t have to be bailed out again. The political management of the first crisis has limited the political options for a second. And he is definite that a second round of stimulus will be required, for which there is little stomach.

That’s the kind of thinking behind Laura Tingle’s question to both leaders in the great debate about contingency planning for a double-dip GFC. In a subsequent article in the AFR she said they both waved the question away.

Seriously, we should think about who would best manage such a crisis – the mob who did it before, or the other deficit and debt-averse lot who by Tingle’s estimation of their budget ‘savings’ can’t count. Whether Labor without Rudd at the helm would have the bottle is also in question.

Stiglitz was also on Breakfast with Fran Kelly and was interviewed by Richard Fidler on Coversations. Richard Fidler, who you might remember from the Doug Anthony Allstars, is a very funny man, but with a serious turn of mind and well-read. His interview covered more ground than Kerry O’Brien’s.

In it Stiglitz explains in clear and simple terms some of the features of the GFC. How banks leveraged capital they used for trading to such an extent that a 3% dip in the assets they were trading could wipe them out. How the financial sector lobbies ferociously and successfully to maintain the right to play their games, how in the US and elsewhere we had regulators that did not believe in regulation and how the reward system within the management of firms did not reflect the risks they were taking.

He also spoke of global warming and climate change. Stiglitz participated in the IPCC process back in 1995. They erred, he said, because they underestimated what was in store. He reckons the science is 99.99% sure but the politics have been captured by special interest groups. Nothing particularly new there, but interesting to see he was fully on board.

What he did say, though, was that the transformations required to create a new energy economy, far from producing a hair-shirt civilisation, would be the driving force for major economic renewal. The risks to advanced economies like Australia and the US lie in not getting on board.

Finally, he had quite a bit to say about the G20. He fully recognized Kevin Rudd’s role, not just in getting it together and rejecting a push to keep it down to 15 or even 12, but also as a broker between the major players.

He did think the G20 was not the right structure, because it left 172 countries out. It was fatuous to think that the likes of China and India would represent the interests of developing countries. The only way forward, he thought, was to introduce representative democracy to the process. Thus, for example, we might have two Latin American countries, nominated by a meeting of the countries themselves for a specified term, say 3-5 years to create both continuity and accountability.

Always interesting he’s recently written a book Freefall: America, Free Markets, and the Sinking of the World Economy. Here is a review in the NY Times but the New Statesman’s review is a must if you want some idea of his scathing criticism of “no drama Obama”, also the limitations of Stilitz’ own thought which always comes back to a middle way type accommodation.

The most searching analysis I have read is from Peter Gowan in the New Left Review from January-February last year. For him the systemic options come down to a clear dichotomy:

A public-utility credit and banking system, geared to capital accumulation in the productive sector versus a capitalist credit and banking system, subordinating all other economic activities to its own profit drives.

An international financial and monetary system under national-multilateral co-operative control versus a system of imperial character, dominated by the Atlantic banks and states working in tandem.

Gowan seems to think that the notion “that banking systems are secured by good rules rather than by authoritative states with tax-raising powers” is a “dangerous joke. So count him as favouring a public utility approach rather than leaving it to the craven capitalists where

the entire spectrum of capitalist activity is drawn under the sway of money capital, in that the latter absorbs an expanding share of the profits generated across all other sectors.

The territory we are getting to here is that the financial system dominates the economy rather than serves it and dominates politics too.

But hey, I just wanted to tell you about some meetings coming up and a bit about Stiglitz. Back in early 2009 Gowan said the America had a last chance to lead the world in developing appropriate global financial systems. But:

it would seem most likely that the American capitalist class will squander its chance.

I think Stiglitz is telling us that they just did.

Update: An article in the Fin Review quoted Stiglitz as saying that the Australian economy would probably survive a second shock because of three factors related to China – export of mineral resources, education and tourism.