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.
