The government's efforts to deal with the worst financial crisis in generations get bad grades from Nobel laureate and Columbia University economics professor Joseph Stiglitz.
Stiglitz, author of Freefall: America, Free Markets, and the Sinking of the World Economy, is least scathing when it comes to the stimulus bill, which he finds an anemic and insufficient response to the recession.
But when it comes to the housing and financial crisis, he is less charitable: "The government has rushed to save institutions it should have let sink and it has let individuals sink instead of coming to their rescue."
Stiglitz served on and later chaired President Clinton's Council of Economic Advisers. He was also chief economist at the World Bank.
Treasury Secretary Timothy Geithner recently spoke with NPR about his confidence in an economic rebound. Geithner said signs that the economy is on the repair include consumers spending more, businesses investing again, and stronger exports, as well as a more stable housing market.
In a conversation with host Robert Siegel, Stiglitz reflected on his book and whether he shares Geithner's optimism.
"Things are better then they are, say, a little over a year ago," Stiglitz says. "But the fact is that even the growth that he's talking about is not sufficient to really create the jobs the economy needs. Unless the economy is growing between 3 percent and 3.5 percent, it's not growing enough to create the jobs, let alone to get the unemployment rate down from the 10 percent that it is today to a normal level."
A New Stimulus
Stiglitz says the U.S. needs a new economic stimulus plan beyond the last year's $789 billion package. "At the very least, we need to be ready to put one into place. States and localities are really suffering. There's a shortfall in the revenues. When the current stimulus package comes to an end, those shortfalls and revenues will be even more marked."
Stiglitz criticizes the administration's approach to the mortgage crisis.
"The problem is the government has been using its ability to lend to give money to the banks," Stiglitz says. "If they had lent it on to households maybe with a little charge for transaction, 1 percent or 2 percent, that would bring down their payments and that would mean that the hundreds and hundreds of thousands of people losing their homes — and with that their life savings — all of that could have been stymied."
The Washington Way
So why did the government give banks money instead of giving it directly to people in need? Stiglitz says the answer lies in the way Washington, D.C., works, with banks having an estimated five lobbyists per congressman: "It's no wonder with that kind of clout that the banks get more of what they want and American households get less of what they need."
Stiglitz dashes the perception that the economy was humming along quite well until unexpectedly it went over a cliff a couple of years ago. Across the world, this has been an era of economic crises.
"From a global perspective, we've had one financial crisis after another," Stiglitz says. These include economic upheavals in Mexico, Thailand, Indonesia, Korea, Argentina, Brazil and Russia.
"So the banks have consistently done a bad job in assessing creditworthiness," Stiglitz says. "They've consistently been bailed out by public institutions. So, this is not the first crisis and we should keep that in mind."