Nobel winner Joseph Stiglitz predicts recession's end: not now, but 2012
Filed under: Economy, People, Goldman Sachs
Did you hear? The recession is over! Or at least it will be in the foreseeable future! And several of our leading economic sages have said so, so that makes it true. Or does it? Not when there's a prominent naysayer like Joseph Stiglitz. The Nobel-winning economist, a former head of the World Bank and now a professor at Columbia University, has a blunt -- if characteristically bearish -- warning of more economic turbulence ahead.Stiglitz's outlook is anything but rosy. Americans must prepare for the recession to continue until 2012 -- practically, if not technically -- he said this week in an interview with DailyFinance. Stiglitz blasts the use of complex derivatives, which he says go against "the social good," and he reserves special contempt for Goldman Sachs and the $13 billion injection it received from the U.S. as part of AIG's counter-party bailout last year.
Just after returning to New York from Japan, Britain, and economically devastated Iceland, Stiglitz paints a picture of a U.S. economy that has stanched the most serious bleeding but remains deeply wounded. "I think we would be lucky to be out of the recession by 2012," Stiglitz says. "2010 may be a year of positive growth, though far weaker than would be necessary to get unemployment down significantly." Central to the grim diagnosis, Stiglitz says, is the lack of new jobs -- an argument echoed by the Organisation for Economic Cooperation and Development, which this week said high unemployment in the world's wealthiest countries could last years.
With President Obama's stimulus program ending in 2011, the U.S. faces continuing turmoil, says Stiglitz. "There is likely to be weakness again in the economy in 2011," Stiglitz says. "2012 is an optimistic view of when we could be over the travails. The technical term 'recession' is two quarters of negative growth, and we're likely to have positive growth this quarter and next quarter -- but that's not what most people mean by 'out of recession.' Most people mean, 'Are jobs plentiful? Is unemployment low? Are wages strong?' And in those core ways, we are far from being out of the recession."
Still, economic conditions have improved over a year ago, Stiglitz allows. "We're no longer at the precipice, but there are many bumps ahead," he says. "The couple million homes in foreclosure, commercial real estate, high unemployment, mean that some people are not going to be able to repay loans that are outstanding. The banking system is by no means out of the woods. There is reason to believe that there will be continue to be bankruptcies of the banks."
Stiglitz is particularly troubled by the continued failure of small to medium-sized banks that provide the lifeblood of capital to the country's small businesses. "That will impair the 'real' sector, and create more unemployment, and contribute to the vicious weakness and downward cycle of the economy."
Stiglitz also criticizes the government's bailout of the major Wall Street banks. "There certainly are questions about the AIG bailout," Stiglitz says. "$180 billion went to AIG. That's a lot of money. And when we finally got the disclosure of where the money was going from AIG, the original suggestion was that it was because of concern about systemic risk. The largest recipient was Goldman Sachs, which said they did not need that money.
"But questions could be raised about whether they were just saying that," he continues. "The main problem that Goldman raises is a question of size: 'too big to fail.' In some markets, they have a significant fraction of trades. Why is that important? They trade both on their proprietary desk and on behalf of customers. When you do that and you have a significant fraction of all trades, you have a lot of information."
Further, he says, "That raises the potential of conflicts of interest, problems of front-running, using that inside information for your proprietary desk. And that's why the Volcker report came out and said that we need to restrict the kinds of activity that these large institutions have. If you're going to trade on behalf of others, if you're going to be a commercial bank, you can't engage in certain kinds of risk-taking behavior."
On the issue of complicated financial products developed by Wall Street firms to manage risk, Stiglitz was blunt: "I cannot find a social good in complex derivatives. They were designed to manage risk, but they actually increased risk." Some countries, he notes, don't allow them.
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Reader Comments (Page 1 of 1)
9-17-2009 @ 2:29PM
p.berman said...
Stiglitz is one of the truly capable economists not beholden to either current government or business interests. His views on the unfolding economic outlook merit careful attention.
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9-18-2009 @ 12:34PM
STATEMAN26 said...
Professor Stiglitz should consider running for the presidency as an independent. If the American people have no sense that this financial scandal can be brought to closure ,that the Wall Street thieves are punished, and strict controls are imposed on ALL banks, then don't wring your hands and wonder in amazement at the prospect of rural and urban terrorists marching up Capitol Hill with guns, swords, and torches.
We may be fast approaching the era when "Madam Guillotine" is hauled out both on Capitol Hill and on Wall Street. I've never seen the American people so bitter, disillusioned, and down-right inflamed since at least the era of "The Red Scare" in the late 40s and 50s and the Palmer raids of 1920 in response to a fear of rising anarchy and bolshevism.
So, should we be surprised to find politicians and extremists, both far left and the far right, threatening insurrection, secession, bandying about the idea of civil war, and calling for bringing guns "next time" to the Tea Party?
9-18-2009 @ 10:35PM
tk said...
When the entire government including the Congress, Obama and George W. as well as the mass media are acting on behalf of the likes of GoldmanSachs, I truly appreciate people like Professor Stiglitz and Mr. Paul Volker along with very few courageous journalists who speak for the common folks.
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9-18-2009 @ 7:24PM
Mur said...
I don't think the actions were intended to help Goldman. Their and AIG's rescue was designed to create a bigger problem for the rest of us (systemic risk) like we had after Lehman collapsed. Goldman had people who were smart and lucky enough to put most of their risk on other parties and that's what should be regulated - as a bank they can't put the rest of us into this kind of situation.
Some people are focusing too much on bailouts - where the gov't was already in a lose/lose situation - and not focusing enough on how to prevent the siutation.
9-17-2009 @ 5:15PM
sgentilejr said...
Actually even Professor Joseph Stiglitz is painting an overly rosey picture for our economy. Face reality___There will be No Recovery. Not now. Not next year and not by 2012. In fact the exact opposite is true. Things will get far worse than they are right now. The reasons why are very simple.
1) "Consumers are the Economy" and consumers who are taking pay cuts, working reduced hours or unemployed and who are already in debt way over their heads cannot spend more to get us out of the downturn because their pockets are already empty.
2) Government debt and borrowing on both the Federal and State level is increasing___which is pulling money out of private sector economy that would normally be loaned to business for expansion or available for mortgages and other consummer loans..
3) Tens of millions of Baby Boomers are retiring over the next few years and that will drive up the need for more and more borrowing by the Federal Government to pay social security and medial benefits.
4) Last, but probably most important____The HS drop out rate is increasing nationwide. In 1970 we were number one in the world in education level. Today we are down to number 27 in the world and still falling in over education level compared to the rest of the world. Louisiana has an 80% HS drop out rate. Alabama and Mississippi have a 50% HS drop out rate. NYC, Chicago, Detriot, Newark all right around a 50% HS drop out rate. We can count on more crime and on a lower standard of living as our education level declines.
Maybe, and that s just a maybe__by the year 2020 we "might" see some improvement as the Baby Boomers die off and government costs start declining....maybe.
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9-18-2009 @ 10:00AM
David Wiedenfeld said...
It's worse than that: You forgot oil prices. As the world economy improves and oil prices go up, it especially disadvantages the US, because of our inordinate dependence on oil. All those people who commute long distances to low-paying jobs? Their money will all be going to transportation. The whole economy, in fact will be drained.
I think you're too optimistic. The economy will NEVER recover.
9-18-2009 @ 2:25PM
STATEMAN26 said...
All the more reason for a Marshall Plan for education, particularly at the pre-school level and at the college level. It will take hundreds of billions to get college loans to anyone with the grades, the will power, but lacking the funds.
I totally agree with the president that this must be a third leg to his stimulus package. In fact, he should be spending even more in this area. Obama was right to take the loan program away from greedy bankers who have defficated all over themselves in the public's eyes, and who cannot be trusted with one thin dime of the people's money.
Students, particulary the promising ones, don't need the additional burden of being in hock forever to the money changers in the temple.
9-17-2009 @ 8:20PM
Davey Rockyfeller said...
I agree and the use of Derivatives- the function of a rising or dropping trend is very dangerous. Trends and technicals work most of the time but highly leveraged bets can wipe out all gains at the derivative leveraged rates. Just calculus applied to trend movements. The first case with Long
Term Capital Management should have shown that derivatives can maginfy loses to unbelievable levels and at a speed that can overwhelm even computers. You have JPMorgan Chase and Goldman Sachs with derivative positions exceeding the total money on earth but a factor which is almost infinite. The created schemes which collapsed AIG and the banksters to their benefit and enabled them to claim "crisis" and take over the US Treasury is one thing but wait until the Chinese figure them out. Already the Chinese government has informed corporations that they no longer have to honor fraudulent derivative commodity contracts with six US banks. The Chinese have demanded their physical gold from London, stopped all silver exports and launched a huge drive to get their citizens to buy gold and silver for real wealth. China is now then largest gold producer, used it's levergage to get the best oil pool in Iraq with BP, and the new Japanese government got the next best pool for Nippon Oil. Also Japan wants to renegotiate it defense agreements with the USA and niether is keen on buying huge quantities of US debt. As the USA is over 100 trillion in the hole counting the debts and unfunded liabities and we are "monetizing the debt"(printing up paper to buy own Treasuries) I can't see anyway out but devaluing the dollar as fast as the Chinese let us. The derivative contracts of commodities and gold and silver may keep the prices down for awhile but the long term trend is down for the buck and USA. David Rockefeller's global economy means the USA has to drop to a level with the rest of the world to compete. We can't just used as consumer botts when our credit and cash are gone, we need to reach a competive level of operation and make tradable goods. Possibly a race to the bottom and it could be a long painful one. Take a good look at downtown Detriot, an American apocolypse. Just like one of those old movies about the future after a nuclear war only this was economic war and we lost. Gangs, homeless, abandoned towers, train station, hotels, a lifeless hulk. The globalist banksters sold us out and human beings are only a cost, a liablity on a banker's balance sheet. Derivate that Goldman Sachs and JP Morgan.
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9-18-2009 @ 3:15AM
stephen said...
The AIG bailout which was performed without the approval of congress stunk. Lehmann was sacrificed to bailout Goldman Sachs.
I would predict that if the banks were forced to go back to mark to market accounting, we would be still hearing about multibillion dollar losses every quarter.
The United States economy has nowhere to go, the debt mountain is so high, that consumer spending cannot recover.
Americans must realise that they spent the inheritence on consumer goods manufactured overseas, healthcare that did not deliver, as well as buying bigger and better guns.
I predict a massive drop in the standard of living of most Americans over the next decade, which will correspond to high inflation and depreciation of the US Dollar long term.
The way forward for America, is to become innovative and productive. Make items every one needs, not just build another shopping mall at the base of an office block.
Joseph Stiglitz predicted this mess in 2006/2007. Look at his previous statements and ponder the future, he is usually correct.
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9-18-2009 @ 9:46AM
ssg13565 said...
sgentilejr is wrong on all fronts
1) "The consumers of the US were the economy" - The US consumer will not lead the world out of this recession. The consumers in places that have underconsumption will lead the way instead of the consumers in places like the US where overconsumption was the norm and should not be repeated.
2) Government borrowing is taking money out of the private sector economy which is not able to spend anymore. It has been overspending for years. The money will now be put into the public sector where underinvestment has been rampant for years.
3) Health care reform will counterbalance the effects of the growing ranks of retired baby boomers. Automation will be used to replace the lost workers.
4) The very increase in public sector investment decried by sgentilejr can be used to stop the decreasing emphasis on education in this country. Finally, we have an administration that thinks a gentlemanly C is insufficient to compete in the world. We no longer have a President who proudly touts his poor performance in school as a major reason why we should have elected him.
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9-18-2009 @ 10:37AM
akorozco said...
Stiglitz isn't the only one who disagrees with Bernanke - this video (http://www.newsy.com/videos/is_the_recession_over) shows that media around the world are skeptical of the announcement. We're not out of this just 'cause stocks rallied at the good news!
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10-02-2009 @ 12:41PM
Michael said...
So technically we are out of the recession, but our production levels are 20-50% less, depending on the sector/industry, then they were a year ago. I don't think that Mr. Stiglitz is saying anything new, since most economist say we won't reach previous employment, production, etc. levels until 2012 at best. His value added is more of framing the issue in a truer light.
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9-18-2009 @ 1:56PM
RGL said...
While there are positive indicators recently outlined by Mr. Bernake, Stiglitz seems more measured and, as pointed out in comments above, impartial.
Renee Fellman, a Pacific Northwest-based turnaround expert, believes the two measures that we should be paying the most attention to are GDP and unemployment. Until both of these show measurable progress, in her experience working with failing companies, we are still in uncertain times.
She is giving armchair economists a shot at winning $1,000 by giving their own predictions based on these two measures. Visit her blog and enter her contest, “Are you smarter than an economist?” at:
http://theturnaroundblogger.com/index.php/are-you-smarter-than-an-economist-contest/
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9-19-2009 @ 11:03AM
TwelveTwelveProphet said...
Yes, this recession will end in 1212...when the Final Depression makes the US of A the first 4th world nation. Definition: A 4th world nation is one that is starting over again from scratch.
So writes
The TwelveTwelveProphet
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9-21-2009 @ 8:53PM
t said...
My business supports the transfer of manufactured goods and overall, orders are off 40% since 2007. Now, add a 20% price reduction for most contracts and you have horrible economic conditions.
And Nobama wants to fine me 8% for not being able to offer health insurance, folks we don't make 8%. The best I can offer is straight pay for hours worked and I'm struggling to do that.
So if universal socialized healthcare is passed, you'll get free ulcer medicine while you starve under a bridge as many more struggling businesses close. Great, just what we need more unemployed.
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9-26-2009 @ 12:02AM
xynz said...
I love how the silly right wing myths keep perpetuating themselves, no matter how ridiculous they are:
"Government spending pulls money out of the private sector".
That statement might make sense, if the government weren't actually SPENDING THE MONEY IN THE PRIVATE SECTOR. Except for the interest on Federal debt that is held by foreign investors, nearly ALL government spending goes into the private sector. The main reason why interest payments are even going to foreign investors in the first place: is because conservatives would rather have tax cuts, than balanced budgets.
Then there's the claim that universal, socialized health care will result in an 8% fine against those who don't pay for their employees health insurance. That kind of thinking shows how blinded people can be, by their ideology. If you had universal, socialized health care (like you have universal, socialized police protection), then you wouldn't have ANY fines for lack of private health insurance: because your employees would ALREADY BE COVERED by the universal, socialized health care.
The 8% fine is the wet dream of the PRIVATE health insurance lobby. The PRIVATE health insurance companies are the driving force behind PRIVATE health insurance mandates. That's why they are doing everything they can to stop the United States from getting universal, socialized health care (sometimes called "THE PUBLIC OPTION").
The PRIVATE health insurance companies are spending hundreds of millions on lobbyists and propaganda campaigns (PR) to defeat socialized health care; their payoff will be hundreds of billions in PRIVATE health insurance mandates.
The United States has the most expensive and least efficient health care system in the world. If it had the "best health care system in the world", then its infant mortality rate wouldn't be ranked #48:
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2091rank.html
The "best health system in the world"? It doesn’t have a life expectancy ranking of #50:
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2102rank.html
You can't get a more objective measure of how well a health care system is working, than its infant mortality rates and life expectancy. In those regards, the US lags very far behind civilized nations that have universal, socialized health care.
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