Monday, December 22, 2008

Minutes of the lecture delivered by Prof. Joseph Stiglitz at the seminar titled ‘Crises Today and the Future of Capitalism’

The seminar titled ‘Crises Today and the Future of Capitalism’ was organized by Institute of Social Science (ISS), Planning Commission (Government of India) and Swiss Agency for Development and Co-operation (SADC). The seminar was held on 20, December 2008 at Mavlankar Hall, Rafi Marg (near Planning Commission). The discussion started on a remark on the 9/11 event by George Matthew from ISS. He pointed out the problem with the Lehman Brothers case in the backdrop of the current recession being faced by the United States (U.S.). He informed the audience that Prof. Stiglitz’s areas of research were on screening and asymmetric information. The importance of State cannot be ruled out according to Stiglitz, he said. He also informed that Prof. Stiglitz worked on how coercive institutions of the State can be constrained.

The first point that Prof. Stiglitz mentioned was that the world is facing depression. The problem is similar to the crisis that happened in the 1930s. He informed that what started in the United States (U.S.) has spread worldwide. He asked what is the nature, the consequences and the responses to the present economic crises. He emphasized upon the required reforms to tackle these kinds of crises. He said that the Central Banks are too much worried to curb inflation at the cost of growth and fiscal expansion. He asked for the need of better monetary policies. The crisis is similar to the Great Depression in the era of 1930s, he informed. 75 years back the banking system was relatively easier. Today, the banks are more into complex financial and business relations. The banks are more into gambling like buying derivatives, which is risky, Prof Stiglitz said. He emphasized upon the point that financial system is a means to an end for a steady and sustainable economy. The financial system should look at raising gross domestic product (GDP) and productivity. The banks in the U.S. did not mobilize savings. Instead, they created risks. There was a contradiction between private investments and social returns. The CEOs and management of these banks have walked out with the money that belonged to the society. The Central Bank took the credit of low inflation. There was no attention on the asset market. There existed loose monetary policy. It was the housing bubble that led to consumption boom. The savings rate in the US has gone down to zero. There is short sightedness in the policies pursued by the U.S. In the early 1990s, banks in the U.S. used to engage in securitization. There was under-estimation of the problem of price decline. Students of Stiglitz often forgot to understand the warnings that he delivered. The U.S. has sold many toxic mortgages to Europe in the past, Prof. Stiglitz informed. Diversifications of asset do not help in the time of recession. There is a notion that has cropped up, which is called self-regulation. But this thing would not work in the present scenario. The credit rating agencies need to be criticized. There is a need to understand the present macroeconomic problem. One has to understand the bubbles created by the U.S. economy in the past. The U.S. is facing both social and economic tragedy, according to Prof. Joseph Stiglitz. People do not have money to educate their children. But why bubbles?—asked Stiglitz. The reason: the Central Bank thinks there should be lesser regulations for achieving more economic growth. The U.S. in the past faced consumption led boom. The tax-cut for the rich Americans is a bad decision by Alan Greenspan. There is need to give tax-cut to the poor. President George Bush (junior) made a mistake to go for the Iraq war, according to Prof. Stiglitz. There was a price associated with war, he informed. In the decade of 1970s, there was a depression. The import bills of the U.S. used to be high due to high value of petroleum and petro-products. Latin America used to survive just by borrowing during those days. However, in the 1980s L. America faced poverty, recession and unemployment. In the present scenario one should mention that the problem started in August, 2007. The problem related to bail-outs should not be ruled out, he said. Almost 50 million Americans do not have health insurance. There was a Bill to ensure them health insurance. But it was due to President Bush the initiative never materialized because he vetoed the Bill. Recovery of the banking system is necessary but not sufficient. The U.S. is going to face national debt, Prof. Stiglitz informed. Fiscal responsibility in itself is not enough. He also talked about the case of Freddie Mac. He informed that initially AIG said that it owns a debt of US$ 20 billion but later it increased the amount to US$ 80 billion in order to get debt relief from the U.S. government. It is quite important that the money given for debt relief is spent well. In fact, the United Kingdom wanted such kind of regulation but it was the U.S. which opposed a mechanism for monitoring the spending of the money given as debt relief. Prof. Stiglitz informed that the trickle down policy is not working at all. It is good news that Obama has been elected as President. Obama has promised creation of 2.5 million jobs. But there is need for creating 8.0 million jobs because due to recession unemployment has increased. The banks have gambled enough. They have not kept their balance sheets well. If the US$ 700 billion is used to create new accountable institutions rather than supporting old, corrupt institutions, then that would have been good. The present crises would change the entire debate on sustaining capitalism. The World Bank and the IMF need to look at the problem in a different way. Probably, the Congress men have been bribed in the recent case of bail-outs, he alleged. There is need for regulations in the derivative market. The U.S. has privatized profits at the cost of social losses, which is against the basic theory of capitalism. In the Economics classes, much is lectured on 19th century capitalism, rather than on 20th and 21st capitalism. Many Central Bankers were using excessively simpler models. The entire economics profession has failed. Today, everybody claims to be a Keynesian. But there are various kinds of Keynesians. Globalisation has failed because of pursuing failed economic ideology. The Washington Consensus has failed. People have not understood market failures. Money is leaving developing nations to the U.S., where the crisis is taking place. Globalisation is managed in an asymmetric way. India and China need not feel shy. The United Nation has some level of legitimacy. So, it has to be brought into the picture. The problem has to be solved at the global level. There is insufficiency in global effective/ aggregate demand. Many countries have learnt from the problem that happened in 1997. Money has gone to the people who do not have needs. There is need for regulatory arbitrage. The offshore secret banks need to be exposed. There are companies who evade taxes. The kind of lending, which the U.S. is giving is not fair. Corporations in the developing countries should have access to credit. There is need to address the governance problem. Capital outflows are taking place from the developing countries to the U.S. Not only global equity but also global stability is required. The fall of the Berlin wall indicates the end of Communism. There was problem with the Communist system. September 15, 2008 can be regarded as the defining moment of market fundamentalism. The invisible hand is invisible because it is not there at all. There is a need to make globalization work for all.

Mr. Somnath Chatterjee, Speaker, Parliament of India, thanked Prof. Stiglitz and said that the pitfalls of globalization need to be understood. He said that public sector banks in India are relatively more insulated from the current global crises. He said that there are needs for more regulations. He asked for more transparency and accountability in governance. He added that India pursued mixed economic planning in its early days after Independence in order to avoid the pitfalls of extreme communism and extreme free market.

Finally, Mr. A.N. Roy from ISS thanked the panel.

No comments: