Pittsburgh, 24 September – Third World Network
At an event in Pittsburgh organized by a coalition of several non-profit organizations and social movement groups, Stiglitz spoke to an audience of several hundred on the G20 Summit in Pittsburgh, assessing what the G20 has achieved so far and where it has fallen short. The key problems in the world economy and financial markets that has led to the deepest recession since the Great Depression have not yet been effectively addressed by the G20. Instead, the world is witnessing how the very banks that were deemed ‘too big to fail’ are only getting bigger, having been offered a carte blanche by the world’s most powerful leaders.
One of the major problems with the international financial system is big banks. “Our ‘too big to fail’ banks are only bigger today, and meanwhile, we did not give enough funds to the smaller banks who lend money and create jobs,” Stiglitz highlighted. The US financial crisis response policy did not focus on lending. Instead it focused on the institutions whose primary activity is gambling, of making profits by trading, not by lending.” Risk management as it is currently practiced is not reflected in the rewards given to bank and investment firm gamblers.
“I call the bank bailouts an ‘Ersatz capitalism,’ marked by the privatizing of gains and the socializing of losses,” said Stiglitz. The Obama administration’s way of dealing with America’s ailing banks is actually a win-win-lose proposal, where the banks win, investors win, and taxpayers lose. This distorts incentives, and the US has not even begun to address the incentives problem underlying the subprime crisis.
The financial sector regulation enacted so far has not been enough. There are five lobbyists from Wall Street institutions for every Congressman in the United States government. For years the financial sector has been pushing deregulation, massive bailouts of banks and investment firms, and innovative ways to stifle major financial regulations that are needed to ensure that crises do not keep recurring. There is a valid fear that these lobbyists will drive the crisis-response agenda in Congress. France and Germany have been pushing very hard on incentives, however, the US has done almost nothing on the issue of ‘too big to fail’ banks.
One of the key questions is how to get financial institutions to do what they are supposed to do, which is to provide financial assistance to taxpayers and communities. While the G-20 has been trying to stop risk-taking, they are still not directing banks to provide taxpayers and homeowners with, for example, mortgage assistance, which other countries have sound systems in place for doing so. The US financial market has resisted doing what the people in a society expect and need it to do. The best that can be hoped for out of the G-20 Summit this week is that it sets an agenda for the next meeting.
Stiglitz said that while the Group of 20 is marginally better than the G-8 or the G-7, there is still only little more possibility of democratic accountability than previously. Although it is easier to organize 20 leaders than 192 on a practical level, there is not a single representative for sub-Saharan Africa in the G-20 other than South Africa. In relative comparison to the G-192 of the United Nations, the G-20 does not reflect the voice and priorities of the global community
Why is there a need for global governance at all, asked Stiglitz. In economics, there is the concept of externalities, in that what one person does affects another. The US financial market had enormous negative effects on the rest of the world. Through the process of deregulation, not only did the US export its toxic assets, but also its recession. And yet, the United States has not taken responsibility for its actions in the rest of the world.
“For many of the Western leaders, climate change is a problem for the future. But in many developing countries it’s an issue of here and now,” said Stiglitz. For example, countries such as Bangladesh and the Maldives are forecasting that much or all of their land will be submerged underwater in the near future. There is now a broad consensus that the way in which the rich countries have industrialized, and continue to do so, will not just harm other countries, and in particular the poorest countries in the South, but will put the entire planet in risk. How do we share the burden equitably between the rich countries and the poor?
At the UN Climate Summit just held in New York, China came out with a very strong statement about how it will reduce its emissions. However, the United States produced only rhetoric about how the world needs to address climate change together, because when it comes to climate finance, the most critical aspect in the upcoming negotiations in Copenhagen in December, the US is not conceding significant amounts of funding for developing countries to be able to employ the technology and money needed to combat the climate crisis. The amount pledged for climate finance is about $100 million for mitigation and another $100 million for adaptation. “What is this amount worth? In light of the trillions spent to bail out banks and financial institutions, it is not much,” Stiglitz emphasized, while reiterating the sentiment that “climate change is part of the solution to the financial crisis not part of the problem.”
“The global economic recession is not over, and it is not likely to be over for a very long time,” said Stiglitz. The strength of the ‘green shoots’ we see emerging is not strong enough to provide the legs needed for a substantial boos in global and national employment. “That means if we are not growing by a GDP rate of at least 3.2%, employment will not reach pre-crisis level. This is not time to be talking about an exit strategy.” Discussion of an exit strategy from the fiscal stimulus and loose monetary policies, which have been the pillars of the developed economies response to the crisis, is on the agenda of the current G20 Summit in Pittsburgh.
The poorest of the middle-class in the US has become 4% poorer in 2008 than 2007. What most Americans were told is to not be bothered by the fact their income is going down. Americans were instead told to consume as if their income is going up, and to do so by borrowing, which proves beneficial for banks. However, that model has now been broken. Most Americans have to accept that their standard of living is going to go down, and nobody has been talking about that so far.
The issue of global imbalances, the surpluses of emerging market and developed nations juxtaposed with the deep deficit of the US, is at the center of the discourse of what caused the crisis. One response to addressing China’s large trade surplus is a suggestion that China and some other countries need to have more flexible labor market policies (i.e., lower wages and less labor law practices). This is not the answer. Germany and France have done much better than other countries because of job market protections.
A global response is now necessary from the G20. “Developing countries have been much worse affected than even the United States, and they do not possess the resources that we in the United States have,” said Stiglitz. At the G-20 Summit in London on April 2nd world leaders committed a substantial amount of money ($1.1 trillion), but almost all of it ($750 billion) was through the International Monetary Fund. “This is a problem,” Stiglitz stressed, “because most developing countries are just recently getting out of a major debt overhang, and the IMF’s loans exacerbate debt problems. Second, the IMF is the very institution that promoted free capital markets and economic and financial liberalization.” The fact that the G-20 allocated its funds, almost entirely, to the IMF means in part that the world does not yet have the right kind of institutions for effective crisis response. However, this does not mean that countries have to rely completely on the IMF. Other global institutions, such as the International Labor Organization, should be among the institutions given responsibility to implement some of these solutions. This G-20 Summit is the first one where the head of the ILO will be present.
In conclusion, Stiglitz mentioned the work he has been doing with the International Commission on the Measurement of Progress. “In a performance-oriented society, what we measure is what we do. Therefore, our systems of measurement become very important. Unfortunately, they are very flawed. They don’t for instance take into account, for example, environmental degradation. As a result there are no performance incentives to focus on the environment.” Instead, world economies measure output by input. The healthcare sector in the US is the most inefficient in the world, however, the input into the sector is measured at 16% of GDP, which is what the sector is measured by. However, the output should instead be measured.
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