Joseph Stiglitz Gets It!

Since my post yesterday, I have read a number of articles that have given me hope that the business press is beginning to get it about the seriousness of our current situation and others that make me despair that we remain in a state of delusion about our economic future. Oddly, all these come from Brazil's Exame magazine and web portal in the last week.

Yesterday, I read an article from May 7 that states that the Bovespa at 51,000 points still has room to move up. None of the quoted sources seem to indicate that this is at all based on the same market unreality that led the same index to fall below 30,000 just last October. Two days earlier, it was extolling the virtues of index funds ("the American way of investing"). The appearance of new sounding financial techniques is one of the hallmarks of the type of irrational investing that Galbraith so thoroughly trashes. It provides a new cover, but the content – leverage – remains the same.

The hope comes from an entry I read this morning of the results of a conference of 3 Nobel winners that Exame held yesterday. The stunning remarks were those of Joseph Stiglitz. He gets it.

He basically held that the last boom was fueled and based on the acquisition of more and more debt. He praises Kenneth Rogoff, Jeffrey Sachs and Paul Krugman for predicting the collapse of the real estate bubble because of its basis in high consumer indebtedness.

He also perceives that the government is wasting its opportunities to rescue the economy by instead rescuing banks and that these opportunities are now in danger of disappearing as the US Government will at some point have to begin to cut its debt.

The real danger for the future, the danger that we could end up in a mild version of Depression of the 1930's is that demand worldwide is falling and is now making up part of the same vicious cycle that prolonged the Great Depression: weak economy leads to unemployment leads to payment default which then further weakens the economy.

He also points out that countries, such as Brazil, that have managed and regulated their economies well in the recent past will also suffer because the decline in exports due to weak demand in the US and Europe will weaken the economy overall. This is Lula's marola.

In proposing solutions, Stiglitz focuses on control of the banking sector and regulation of the markets as well as the currently popular solution of a world currency (the Special Drawing Rights of the IMF).

Parenthetically, the conference also featured presentations by Edward Prescott, who focused on the prospects of Brazil as a beneficiary of the crisis and Robert Mundell, who repeated the usual conservative, Republican mantra that the solution for the US will come from lower corporate taxes.

It is important that mainstream economists with Nobels are now speaking of the solutions we really need and are addressing the problems we face realistically. This crisis is a product of an exuberance based on speculation and leverage. We will continue to repeat these cycles until those who speak directly to that issue are not considered crackpots and unbelievers (in the orthodoxy of free market economics). Stiglitz' remarks help considerably.