Editor's Note:

The following are excerpts of the talk by Economics Nobel Prize Laureate Dr Joseph Stiglitz as part of THREE Talk at Three on the Bund on Sunday. Titled "Stability with Growth for China and Our World," the talk was chaired by Fang Xinghai, Director-General, Office of Financial Services, Shanghai Municipal Government. Vice Mayor Tu Guangshao also attended the event. Both Stiglitz and Fang gave exclusive interviews to Shanghai Daily columnist Wan Lixin afterwards.



Joseph Stiglitz's talk:

When the US economic downturn began, there was a hope of decoupling, that the problems in the United States would not spread to the rest of the world.

Since then it has been obviously clear that in the world of globalization we have become so integrated that there cannot be a failure in the largest economy in the world without it spreading everywhere.

The US has exported its toxic assets, deregulation philosophy, and recession to the rest of the world.

This is a global recession and the only way that we can recover is by a global effort at recovery.

One of the reasons that the East Asian countries could recover quickly from the 1997 crisis is that they were able to export, as the rest of the world was growing robustly.

This time it is different because it is a global crisis and no single country can export its way out of the crisis.

What is the cause of the crisis? Actually there have been two sets of problems compounding each other. There is a financial crisis, the subprime mortgage, but underneath it is a fundamental problem of macroeconomics.

Some say the monetary authority has let loose excessive liquidity, and there is a lack of regulation, which are both true. But why has there been excessive liquidity and loose monetary policy?

In higher places there have been people who believe in deregulation, that the markets by themselves would take care of everything.

We have a regulator who did not believe in regulation. One of the reasons you do not want the party to get too rowdy is you do not want to clean up the mess after the party.

He now says, "Don't worry, because it would be easy to clean up the mess."

What they did not say is that it would cost trillions of dollars, and everybody else is going to pay for the bill. There is loose monetary policy because there was a need to keep the economy going.

There was a global insufficiency of aggregate demand. One reason is the growing economic inequality in the world.

If the monetary policy had not been so loose, or the interest rates not so low, there would have been a problem of unemployment. The problem is, this (policy) was not sustainable.

Unless we understand the root causes, when it comes to fixing the financial system, we would still have the underlying problems.

Growing economic inequality means that we are moving money and assets from those who can spend it at the bottom to those who cannot spend it at the top.

We told the people in the bottom to consume and kept lending to them.

I want to emphasize how bad this growing inequality is not just in the US but in most of the countries in the world. In the US, median income after adjustment for inflation has been going down even before the crisis.

So all the growth has been at the top, it's not trickle-down economics, it's trickle-up economics.

The second problem in global demand can be attributed to the fact that the 1997-98 crisis had been very badly managed. Because of the mismanagement, many countries began to accumulate foreign reserves.

Thus, there is a global insufficiency of demand. The US said, "Don't worry about this insufficiency of aggregate demand, we will make up for it." So the US, the richest country in the world, is living beyond its means.

It's clearly a very strange global economic phenomenon, that the global economic system requires the richest country to consume beyond its means to keep the global economy growing.

Remedies

Most of the discussions today in what we should do in responding to the crisis had not begun to address the fundamental, underlying problems.

What have they to do in responding to the crisis first in the United States and then in the rest of the world?

Well the first part of the response is strong stimulus.

The good news is everybody says today that we are all Keynesians.

But there are Keynesians and Keynesians. Some of them do not really understand Keynesian economics.

The magnitude of the US stimulus is much less than it is widely understood.

While the federal government is stimulating, the state governments are destimulating.

Another problem has to do with the underlying problem of the mortgages.

What we are doing with the banks is like giving a massive blood transfusion to a patient suffering from internal hemmorhage, and doing nothing about the internal bleeding.

Finally we are doing something about it, but what we are doing is not enough.

Given our huge deficit, we have to be very careful with the spending. But the way we are dealing with our financial systems is not only ineffective, but it also costs a lot of money.

There has been a deliberate attempt to deceive the US taxpayers.

All these are perspectives which make me not optimistic about a quick US recovery: Too little stimulus, and the misguided financial recovery programs.

This is the first major global economic downturn, and the only way to get out of this is a global response that seeks to address the underlying problems. But there are many impediments.

Many poor countries simply do not have resources to have the stimulus.

Europe and Japan had realized this by lending money to the IMF.

But IMF may not be the right place to give the money, because many of its programs are contractionary.

The G20 in their meeting last November emphasized that it is important not to resort to protectionism.

But although the G20 was in Washington, Washington did not hear the message.

The US stimulus package has a provision of "Buy America" for the infrastructure spending.

When there was criticism, they put in another provision saying that this does not apply if there is an WTO agreement. This is a provision discriminating against the poor countries.

There are many forms of protectionism, for instance US and European subsidies to the banking and auto sectors.

We have totally changed the nature of market economics. We have created a new capitalism where we socialize losses but privatize gains, and that does not work.

Editor's Note:

The following excerpts of the talk by Economics Nobel Prize Laureate Dr Joseph Stiglitz as part of THREE Talk at Three on the Bund on Sunday.

Titled "Stability with Growth for China and Our World," the talk was chaired by Fang Xinghai, Director-General, Office of Financial Services, Shanghai Municipal Government. Vice Mayor Tu Guangshao also attended the event.

Both Stiglitz and Fang gave exclusive interviews to Shanghai Daily columnist Wan Lixin afterwards.