Lee has a heavyweight supporter in questioning economic consensus

Story by Tom Kelly

Wednesday, 17th February, 2010 4:40pm

Lee has a heavyweight supporter in questioning economic consensus

Eamon Quinn.

Leaving aside the way he departed Leinster House, George Lee fled a short political career claiming that the Dublin political classes had struck a poor economic bargain. He says government and opposition parties alike will cheer on austerity budgets because they are betting big that world growth will save the economy from recession.

In the same week, Joseph Stiglitz, a Nobel Economics Laureate, was shuttling between European capitals promoting his latest book warning that Washington and the EU remain in thrall to the same banks and unfettered financial markets that created the 'Great Recession' in the first place. It was a coincidence, but Lee and Stiglitz were separately questioning a consensus or gamble that exports will end the slump in European countries, like Ireland. Now, by any measure, Stiglitz is a heavyweight. The Columbia University professor worked as a chief economist at the World Bank, was a former economics adviser to President Bill Clinton, and, a once regular visitor to Dublin, has commented critically on the Irish government's response to the banking mess. More, as an adviser to the Athens government on its debt crisis, he is also a wise commentator on the attacks by sovereign bond markets on Greece and other eurozone countries, including Ireland. 

Described as a 'humane economist' and a 'worthy successor' to the great economist Keynes, Stiglitz has questioned President Obama's economic stimulus as ineffective and said the huge financial bailouts of Wall Street banks and insurance giant AIG have rewarded people for reckless behaviour. His latest book, 'Freefall - Fee Markets and the Sinking of the Global Economy' pulls no punches. The cult of unfettered and unregulated markets benefited a small number of people to the cost of many hundreds of millions.

It should be a must-read for Dublin and London politicians, if the mistakes of recent years are not to condemn us all to a prolonged slump. Prefaces to economic books on the slump do not get better than this: "In the Great Recession that began in 2008, millions of people in America and all over the world lost their homes and jobs. Many more suffered the fear and anxiety of doing so, and almost anyone who put money for retirement or a child's education saw those investments dwindle to a fraction of their value. A crisis that began in America soon turned global, as tens of millions lost their jobs worldwide - 20 million in China alone - and tens of millions fell into poverty." Freefall continues: "This is not the way things were supposed to be. Modern economics, with its faith in free markets and globalisation, had promised prosperity for all. The much-touted New Economy - the amazing innovations that marked the latter half of the twentieth century, including deregulation and financial engineering - was supposed to enable better risk management, bringing with it the end of the business cycle. If the combination of the New Economy and modern economics had not eliminated economic fluctuations, at least it was taming them. Or so we were told."

Stiglitz said the Great Recession forced a rethink on "long-cherished views." The book makes clear that, in truth, nothing of the sort has happened. Full scale reform of banking and financial markets has not even begun. He warns that the responses mirror the mistakes taken in the 1930s. "What worries me is that because of the choices that have already been made, not only will the downturn be far longer and deeper than necessary, but also we will emerge from the crisis with a much larger legacy of debt, with a financial system that is less competitive, less efficient, and more vulnerable to another crisis, and with an economy less prepared to meet the challenges of this century." 

For Irish readers, Stiglitz's experiences are invaluable if the Dublin government is to find more imaginative ways to tame rising hidden unemployment. Stiglitz is an academic economist who knows a lot about making policy amid economic crises. His career at the World Bank evidently taught him that the lessons of the Asian currency crisis in 1997 were ignored. Their economies emerged from deep recession but the consensual prescription for deep budget cuts probably delayed rather than promoted recovery - "the countries in East Asia eventually recovered, but it in spite of those policies, not because of them." The Great Recession showed that the shibboleths in unregulated markets were shown to be threadbare: incentives like big stock options for banking bosses and company chiefs were supposed to promote the best economic outcomes for all. Evidently, they did not. Irish readers will be familiar with the denials of banking chiefs facing into the meltdown in late 2008. Special interest groups, Stiglitz says, infected the economics profession too, as many avowed a strange belief that self-regulating markets would work to the benefit to all. Sorting it out, says Stiglitz, will not just involve "tweaking" the "peculiar version of capitalism that emerged in the latter part of the twentieth century in the United States."  Middle class incomes were falling for years in the US, so the answer of financial institutions and consumers was to prop up spending by borrowing and consuming "as if their incomes were growing."

Then, in late 1999 the Glass-Steagall Act that had controlled Wall Street banks since the Great Depression of the 1930s was dismantled. The Gramm-Leach-Bliley Act sponsored by Senator Phil Gramm indirectly led to the victory of risk-taking investor bankers. Stiglitz says the official numbers, such as the US figures showing a 10 per cent jobless rate, seriously understate the size of the crisis. "Numbers", he suggests, continue to "reinforce our self-deception". "Even now, many deny the magnitude of the problems facing our market economy," as American financial markets directed their energies "at circumventing regulations, accounting standards and taxation".  

Britain did no better. It let its financial sector balloon even bigger and the cost of its bailouts will be proportionately more than that of the US, writes Stiglitz. Irish and British readers will recognise his other observations. The US - under both President Bush and Obama -- "threw money" at the banks but failed to work out a way to get them to lend. Financial journalists here will recognise that his comments on US bankers apply locally, as Irish bankers and banking economists cheered in September 2008 when the government guaranteed the deposits and bond debt of the Dublin banks. "The bankers just wanted to have money pumped into the system," Stiglitz writes on the US. And in a comment that should be taken to heart in the forthcoming Irish inquiry into the banking crisis, Stiglitz says that the people who made, managed and were rewarded by the failed system "must be held accountable." 

Patrick Honohan, the new Irish Central Bank Governor, who is a proponent of the inquiry, is warmly acknowledged by Stiglitz as an influential co-author of studies of  failed regulation in the past. For an American audience Stiglitz writes that the US will only recover if global demand and the world economy is strong. In Stiglitz, former politician Lee may have found a surprising partner in questioning the consensus that there is no alternative to austerity budgets and hoping for exports to pull the economy out of recession.

'Freefall - Free Markets and the sinking of the Global Economy', by Joseph Stiglitz is published by Allen Lane, Penguin Ireland.

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