Alec Baldwin: I’m Alec Baldwin and you’re listening to "Here’s The Thing" from WNYC Radio.
I don't know about you, but I never read the business pages of a newspaper before I was 45. Then something changed. My interest in banking, financial markets, technology and its effects on our lives, my whole view of the role of economics, shifted. Today it's the first section I go to. In my own case, it's The New York Times. Because I have questions. Lots of questions. Roughly three years along from the economic meltdown that still affects us all, I made a call to Dr. Joseph Stiglitz at Columbia University.
Dr. Stiglitz is a rare contradiction. A Nobel Prize winning economist, who speaks in plain English. He’s a renowned expert on taxation, trade and development, who would also be good company at a ballgame.
Presidents continually turn to him for guidance -- under [President Bill] Clinton, he chaired the Council of Economic Advisors from 1995 to 1997 - but he shows no restraint when unleashing criticism of their policies. Of President [Barack] Obama’s financial-industry rescue plan, Stiglitz said that whomever designed it was "either in the pocket of the banks or … incompetent."
Stiglitz was Chief Economist at the World Bank for three years until January 2000, when he resigned in protest over the bank’s policies -- he wanted more transparency at the Bank and felt that the money doled out shouldn’t have so many strings attached.
Joseph Stiglitz gets around. He’s lectured all over the world -- and taught at Yale, Stanford, Duke, Oxford and Princeton. I met him at his office at Columbia University where he’s taught since 2000.
Alec Baldwin: And coming here today I was reminded of why they have orientation weeks at colleges where you spend the first week just finding where you classes are. It was like an Escher print coming here to your office today ...
Alec Baldwin: With Stiglitz, you’re in no need of an orientation. Even if you’re talking about the financial crisis, Joseph Stiglitz calls them like he sees them.
Joseph Stiglitz: Where both Bush and Obama made a fundamental mistake is they didn’t distinguish between saving the banks and saving the bankers and the bank’s shareholders and bond holders. It was both an economic and, I think, a political mistake. Because what Americans saw was that hundreds of billions of dollars were going in to save the bankers, their shareholders, and their bondholders, without any constraint on how that money was going to be used; paid out in dividend, paid out in bonuses.
Alec Baldwin: Do you think that because of the urgency, do you forgive them and say there wasn’t time? Or they should have known that should be less discretion for the banks to distribute the money as they saw fit?
Joseph Stiglitz: I think there was no excuse for what they did. The U.K. did a much better job in terms of playing by the rules of the games.
Alec Baldwin: Did they do it after we did?
Joseph Stiglitz: They did it roughly the same time.
Alec Baldwin: Alright. Do you think that there’s a fundamentally different mindset about investment banking over there than there is in the United States?
Joseph Stiglitz: What was quite remarkable is that in the U.K., banking was even more important than it was in the United States. But the government there had a greater sensitivity about what needed to be done. So their view was, just like in the United States, their argument was, “We needed to keep the flow of money lending if we’re going to keep the economy.” And that was what was so absurd about what both the Bush and Obama administrations did. They gave money to the banks to recapitalized, to lend, but then they said, “By the way, you don’t have to use that money to recapitalize and lend; you can use that money to pay dividends or to pay bonuses.” The critical question is was there something else they could have done? There were many other things they could have done.
Alec Baldwin: Such as?
Joseph Stiglitz: One of the things they could have done is; in giving money to the banks they could have said, “You have to continue your lending. Especially to small and medium-sized enterprises and not use the money to pay out bonuses or to pay dividends.” The second thing they could have done is –
Alec Baldwin: What do you think the banks would have done in response to that? What would they have said?
Joseph Stiglitz: I think the banks had no choice in this.
Alec Baldwin: What prevented them from going to the banks and saying, “We’re going to give you $700 billion, or whatever the figure was initially, and we’re going to give you this money and you are forbidden from using more than a certain percentage of it for distribution in bonuses and in share-holder dividends?” Why don’t you think they did that?
Joseph Stiglitz: Very simple. Politics. They got a lot of money –
Alec Baldwin: And who do you think was the person that was – was it Paulson was the one who was telling, in your estimation, to give unrestricted money?
Joseph Stiglitz: I think it was a broad consensus between Paulson, Bernanke, and Geithner, who was the head of the New York Fed, which was playing a pivotal role because it was the big banks in New York –
Alec Baldwin: Right. So we’re still in Bush’s term and it’s the first bail out and Bernanke and Geithner are predisposed to this as well.
Joseph Stiglitz: Exactly.
Alec Baldwin: Why, do you think, why?
Joseph Stiglitz: I think they panicked. And I think they bought into the mindset and the arguments of the banks, not a surprise that the bankers tried to instill fear.
Alec Baldwin: But how does someone instill fear? How do bankers say, “If you don’t give us this money unrestricted, this is what’s going to happen.” What’s going to happen?
Joseph Stiglitz: The fear, I think, was that the banks would never be able to get private money. People would leave banking. Now to me, it was pretty clear. Where’re the bankers going to go? Especially as the economy goes into a downturn? It wasn’t as if there was a lot of offers for these guys who had brought the economy to the brink of ruin.
Alec Baldwin: Didn’t look good on their resume.
Joseph Stiglitz: It didn’t look good on their resume.
Alec Baldwin: But you’re talking about private money. So you’re saying, “If you don’t give us this money unrestricted, so that the shareholders can be rewarded, shareholders will view this as a very very bear market and a bear environment.”
Joseph Stiglitz: And you won’t be able to raise additional money. And to keep the banking system going, you’ll need more public money. And that’s going to be very difficult.
Alec Baldwin: Do you find that on Wall Street ‘cause what that sounds to me like that there really is just this kind of generic sense of an administration of an FCC of a White House of a Treasury Department that are Wall Street friendly and those that are not Wall Street friendly. And what defines Wall Street friendly is, “You just don’t tell us what to do. We completely run our own shop and you just stay out of it.”
Joseph Stiglitz: That’s right. “We’re the experts.”
Alec Baldwin: We’re the experts.
Joseph Stiglitz: “Don’t mess with us because we’re vital to the economy, if you get us upset –“
Alec Baldwin: They’re like a terrorist with a bomb strapped around their body. “If I go down, you’re all going down.”
Joseph Stiglitz: You see it in so many different contexts. For instance, when AIG was bailed out to the tune of $150 billion, a critical point in that bail-out was that AIG, the government bought back the derivatives. And they paid, for those derivatives, a hundred cents on the dollar. They didn’t want to say where the money was going. Eventually pressure was put on the Fed to tell where the money went. The largest recipient was Goldman Sachs. There were other instances: what the banks did in the process of foreclosure, the robo-signing. Where they were signing affidavits that they had inspected the records and that these people deserved to be thrown out of their houses because they owed money. They had not. So we basically –
Alec Baldwin: We had a banking system where writing mortgages, the banks and the lenders didn’t care whether you could pay or not. Because once they made those loans and those loans crapped out, they believed what? The government was going to step in and bail them out.
Joseph Stiglitz: Well it was actually worse than that; because they were engaged in predatory lending, and discriminatory lending. So it wasn’t just that they didn’t care, they went after the poorest, least financially sophisticated Americans. And they tried to move the money from the bottom of the pyramid to the top in a way that was unconscionable.
Alec Baldwin: When the banks shift to, as you say, both predatory and discriminatory lending, having a market in which a wholesale number of people default on their mortgages, what were the banks hoping for in that market that they created, which was the government would swoop in and bail them out?
Joseph Stiglitz: A couple of interesting aspects of their strategy. One was this financial development called securitization. So it used to be that when banks wrote a mortgage they held on to it. And because they held on to it, they wanted to make sure it worked well.
Alec Baldwin: But once they started selling them –
Joseph Stiglitz: Once they started securitizing, selling them to others, their object was simply to write a product others would buy.
Alec Baldwin: So when the sale by the banks, by the mortgage lending institution, by the securitization of those, when did that start?
Joseph Stiglitz: Well the process really began in the early ‘90s. I wrote an article around 1991 anticipating that this whole securitization was going to end in disaster, and banks saying that they were going to underestimate the probability –
Alec Baldwin: Is this the thing you’ve won your greatest number of awards for was that anticipation? No, okay, we’ll get back ...
Joseph Stiglitz: No. But it was interesting to see the extent that I had anticipated –
Alec Baldwin: You were on to something.
Joseph Stiglitz: What had actually happened. Namely, they underestimated the likelihood that prices would go down. The models rating agencies were using assumed that prices never go down when in fact; you look around the world you see they often do go down.
Alec Baldwin: Right. Let’s stop there. Talk about the rating agencies. You must be a profound critic of the rating agencies.
Joseph Stiglitz: Yes. The rating agencies believed, you might say, in financial alchemy. You take a bundle of mortgages that should have been F rated and you put them together and you convert bad mortgages into an A rated security.
Alec Baldwin: But you dilute them.
Joseph Stiglitz: That was the idea.
Alec Baldwin: You can’t have a bundle of all F and call it A, can you?
Joseph Stiglitz: Well that’s what they did.
Alec Baldwin: So they took what was homogeneously bad bundle –
Joseph Stiglitz: Well not all bad, but there were a very large fraction of bad, and –
Alec Baldwin: Right. Overwhelmingly bad.
Joseph Stiglitz: And what happened was that these bundles collapsed.
Alec Baldwin: The rating agencies are – they serve at the behest of who?
Joseph Stiglitz: The rating agencies are paid by the investment banks.
Alec Baldwin: Right. So it’s like playing in the NFL and the ref won’t throw the flag because the ref isn’t working for the league, the ref is working for – some refs work for each team.
Joseph Stiglitz: For each team. They had incentives that we now know very clearly –
Alec Baldwin: To distort the facts.
Joseph Stiglitz: To distort the facts, to give A ratings, they helped the banks design products that met the minimal standards that were –
Alec Baldwin: Where do people turn for an unbiased rating of securities now? Where do they go?
Joseph Stiglitz: That’s the fundamental problem. That information on the kinds of securities that arise out of the securitization process is very difficult to get unbiased information. And there’s a quandary. If the producer of the securities, the investment banks, pay; you can’t trust the rating agencies. But it’s very hard to get the consumer to pay because one investor might pay, but then that information can spread to others and it’s hard to create a viable business model that will provide the finance for the supply of information.
Alec Baldwin: And does any arm of the government have any legal authority over the rating agencies to force them to adjust their standards and to adjust their methodology?
Joseph Stiglitz: The answer is no.
Alec Baldwin: Why?
Joseph Stiglitz: They’ve tried to claim that it’s just a matter of free speech. My own view is that there needs to be more economy building than that.
Alec Baldwin: This is Alec Baldwin, and you’re listening to, "Here’s the Thing." More in a minute.
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This is Alec Baldwin; I’m talking to Joseph Stiglitz, Nobel winning economist, professor and author. We met in his office at Columbia University. He’s spent a good part of his career advising world leaders on economic issues, but Joseph Stiglitz is no stranger to the world of academia.
Joseph Stiglitz: I went to Amherst College as an undergraduate. I began studying physics. I just love the elegance, the mathematics. But sometime in my junior year I decided that my real passion was economics. I had grown up in Gary, Indiana, which was in some ways an amazing industrial town on the southern shores of Lake Michigan. It was founded by U.S. Steel as the largest integrated steel mill in the world in 1906 and it typified in many ways, America of the 20th century. And you saw both the strengths but also some of the weaknesses. So as I was growing up very aware of very serious poverty, the economic system didn’t always work well. We had episodic unemployment, business cycles, you could see around you lots of discrimination. And it just didn’t seem like a system that was working. It was working for some, but not working for an awful lot of people. So in my junior year in college, I decided I wasn’t going to become a physicist, I was going to be an economist. I went to my advisors, they said, “You should go to MIT.” And so I went to MIT and began doing work trying to understand why markets often didn’t work as well as those people who said the markets were working perfectly.
Alec Baldwin: Free markets.
Joseph Stiglitz: Free markets. People like University of Chicago economists who talk about –
Alec Baldwin: Friedman.
Joseph Stiglitz: Friedman. I’d grown up and I’d seen the markets were not perfect.
Alec Baldwin: Right.
Joseph Stiglitz: But I wanted to know why they weren’t. What was wrong with their analysis, with their arguments? But then I very quickly started working into one specific issue that turned out to be very important. What are the consequences of imperfect information? And some obvious ones related to what happened in the recent crisis. It was the presence of imperfect information that allowed the banks to take advantage of others.
Alec Baldwin: Right. Now when you say this idea of imperfect information, do you think that the system has grown and has evolved so quickly over the last, let’s say, 20 years, that the government can’t keep up. Do the Goldman Sachs’ of the world, and do all the most, I don’t want to say predatory, but the most velociraptor-esque investment banking houses, who just start devouring profits and just devouring equity. Is it because the government just can’t keep up with them?
Joseph Stiglitz: No. Could have done a much better job.
Alec Baldwin: So you believe that’s a profound statement. You believe the government could have prevented much of what happened?
Joseph Stiglitz: It could have prevented much of what happened.
Alec Baldwin: And you’re not saying that in hindsight. At the time they knew there were steps they could have taken.
Joseph Stiglitz: And particular there were people, even on the Fed, that warned them. Ned Gramlich. He was on the board of the Fed and he said, “Something wrong is going on in the mortgage market.”
Alec Baldwin: Right, in terms of the securitization problem.
Joseph Stiglitz: The problem was that you had, at the head of the Fed, some people who believed that markets always worked. That there weren’t such things as bubbles.
Alec Baldwin: Most people in your field, the most sophisticated, the most knowledgeable of minds in economics today, do you find many of them view these bubbles like people in California view the San Francisco earthquake? It’s a total anomaly, what happened in the ‘20s would never happen again, do you think that during the time that you’ve been doing this; they view the crash, that would never happen again. As we get toward ’07, ’08, no matter how the house was shaking they said, “It’s not going to be like ’29 again.”
Joseph Stiglitz: If you look at the history of capitalism, there have been bubbles, panics and bubbles that broke, repeatedly. With each bubble they look at the past and say, “Oh, those guys were very stupid, we’re smarter.” And of course that was true in the last bubble. They believed that it was not a bubble because bubbles were a thing of the past. “We are smart people, we don’t have bubbles.” But in fact, the tell-tale signs that there was a bubble were there for anybody who wanted to look at them. And there were instruments that were there for anyone who wanted to tame the bubble, like raising the down payment.
Alec Baldwin: Volcker. What is Volcker saying that you agree with? Or not?
Joseph Stiglitz; Yeah, I think Volcker is one of the heroes of this story.
Alec Baldwin: Why?
Joseph Stiglitz: Volcker realized that financial markets needed to be regulated. And that was one of the reasons that Reagan looked for somebody to replace him. After all, in terms of what central bankers normally are graded on, he had brought down double-digit inflation down to very low levels. And that would normally have been rewarded by a reappointment, but he was dismissed.
Alec Baldwin: When Reagan comes in people view this as this watershed in that area, about smashing government regulation. What did Reaganomics mean to you then and what does Reaganomics mean to you now?
Joseph Stiglitz: I saw Reaganomics as perhaps another act in a long-standing battle about the appropriate balance between markets and government. And Reagan came in and tried to put his hand on one side of that balance and say, “Let’s get rid of government, let’s just let markets rip.”
Alec Baldwin: Why, do you think?
Joseph Stiglitz: I think it was just ordinary greed. The belief that if we got rid of the regulations --
Alec Baldwin: Donald Regan, all that crap.
Joseph Stiglitz: We could make more money. There was one other argument that, in a way, shows the naivety of the reasoning. In the decades after Glass-Steagall, which was this law that separated investment banking from commercial banking that had tried to put restraints, avoiding some of the conflicts of interest that had marked the past. In those decades after the passage of this whole series of laws and the Great Depression, the country had been remarkably stable. There had not been a financial crisis. And because there had not been a financial crisis, they made the wrong inference. They said, “Financial crises are a thing of the past.” But they were a thing of the past only because we had the regulations.
Alec Baldwin: After we instituted Glass-Steagall.
Joseph Stiglitz: So once you repealed Glass-Steagall, once you got rid of the regulations, once you started going into de-regulation, you started having crisis after crisis.
Alec Baldwin: Do you think we should reinstitute Glass-Steagall, or a modification thereof? Something new?
Joseph Stiglitz: What is clear is that we need to have stronger regulation. The Volcker Rule is one way of doing it.
Alec Baldwin: How would you characterize the Volcker Rule for people who don’t know what it is?
Joseph Stiglitz: The Volcker Rule is a restriction that says banks are supposed to be serving their customers, not making money for their own portfolio. So it’s an attempt to say, “You can’t engage in what are called, proprietary trading, trading on your own behalf, gambling against your customers in the way that Goldman Sachs did.” It just opens up such a can of worms that it’s very difficult for government to stop it once you open up that possibility.
Alec Baldwin: So just to get back to some of the things we were saying, I wanted to ask you, Barney Frank. What did you make of what happened with him with Freddie Mac and Fannie Mae and what the issues were that people were contending about Frank and what he did?
Joseph Stiglitz: A couple of points. One, he, and the Democrats more generally, were very instrumental in ’94 in giving the Fed scope for regulating better.
Alec Baldwin: They were more pro-regulation.
Joseph Stiglitz: Yeah. And had they, had the Fed implemented the regulations that they had the authority to implement, we would have avoided a crisis, at least the worst parts of it. There’s a very large controversy over the role of Fannie Mae and Freddie Mac in the current crisis. In my own mind, there shouldn’t be any controversy.
Alec Baldwin: Why?
Joseph Stiglitz: The evidence is overwhelming that they were a late comer to the problems and basically a sideshow. The fundamental problems were created by the private banks in their sub-prime, fraudulent, predatory practices. The –
Alec Baldwin: So in your mind they don’t deserve to be lumped into the same category as the investment banks?
Joseph Stiglitz: Definitely. If you look at their default rates, at their problem rates, they performed far better than the private sector. Now, after they collapsed the government began to use Fannie Mae and Freddie Mac in part, to bail out the private banks. And to buy bad portfolios and so forth and they became part of the resolution mechanism, transferring money from the public sector to the private sector. So you can’t look at some of the things that have happened after the government took them over and the collapse of 2008, to make inferences about the kinds of lending they were doing before.
Alec Baldwin: Now, you have been out of the government since 2001, correct?
Joseph Stiglitz: I’ve actually been out of government since 1997. I was in the World Bank from 1997 to 2000.
Alec Baldwin: Quasi-government, right. Do you miss that world? Do you ever think about going back to that? It’s been a long time now you --
Joseph Stiglitz: Yes. It’s very exciting. It’s both frustrating and satisfying.
Alec Baldwin: What appealed to you about it?
Joseph Stiglitz: Really difficult problems.
Alec Baldwin: Shaping public policy?
Joseph Stiglitz: Figuring out what to do, then persuading others, because we live in a democratic society. I can’t just decide what I think is the right thing, I have to persuade others. This idea that government officials work 9:00-5:00 is absurd. We had our first meeting at 7:00 am and I had to prepare all kinds of work before that, so that meant you had to get up at 5:00 am and we had meetings that would go on 'til midnight.
Alec Baldwin: If you went back into the political sphere, would you do things differently? Do you think you would have approached your work differently, in hindsight?
Joseph Stiglitz: Actually, I feel reasonably satisfied about what I did, with the battles I fought –
Alec Baldwin: Positions you took.
Joseph Stiglitz: I fought against the deregulation of the financial sector and when I was there we did not repeal Glass-Steagall. I guess I would have hoped I would have been more successful in some of the battles. You always wish you could have done more.
Alec Baldwin: So you come back into academia and have students changed?
Joseph Stiglitz: One of the things I think that has changed, certainly since I was a graduate student, is that there are overall fewer of the very best students that go into academia, into public service. One of the major misallocations of the financial sector is the misallocation of our scarcest resource, our young people.
Alec Baldwin: How so? That’s a fascinating point.
Joseph Stiglitz: Many of them could not resist the temptation of these __-sized bonuses. Many of them went in thinking that they would work for a few years, make their fortune, and then do what they want.
Alec Baldwin: So they’d rather be Lloyd Blankfein than Joseph Stiglitz, many of them, in terms of the career path.
Joseph Stiglitz: Unfortunately I think a disproportionate number, I don’t think they think of it as Lloyd Blankfein, but I think the –
Alec Baldwin: Lure.
Joseph Stiglitz: The lure of money was irresistible.
Alec Baldwin: And is today.
Joseph Stiglitz: Still today, but more guarded, because more of them see the problems of the financial sector. More are aware that money doesn’t buy happiness. And they want to feel good about their lives and what they do.
Alec Baldwin: Do you see yourself in that room sometimes?
Joseph Stiglitz: I find that there are a few students who have that kind of deep curiosity, a few that have a real commitment to help our society, help developing countries. What I find also extraordinarily disturbing is the kind of, you might call, I don’t want to say fear, but the worry, are they going to get good jobs, are they going to get promotions. Does the economics profession care about the things they care about?
Alec Baldwin: So when you draw that line, from the young man in Gary, Indiana, who was fascinated by the whole quilted nature of the economy in his own home town, and then went to Amherst, thought he wanted to go into physics. Went to MIT, went into economics, when that man wins the Nobel Prize for economics for that very thinking, how did you feel?
Joseph Stiglitz: Well obviously I felt very pleased. I think one of the things, though, that as you study things, you understand how complex things are, how much more there is to understand. The other thing, I guess, which has been, might say, the frustrations, is – well I think there’ve been these enormous advances in economic science and our understanding of the ways markets don’t work. Our public policy, our ability to persuade the population in general to move policies –
Alec Baldwin: Implement.
Joseph Stiglitz: Consistent with these ideas –
Alec Baldwin: Enforce.
Joseph Stiglitz: Enforce. In some ways we’ve been moving backwards.
Alec Baldwin: There’s a disconnect.
Joseph Stiglitz: There’s a disconnect. The period in which the free market ideas gained the upper hand in the United States, beginning in Reagan, 1980, was exactly the period when economic science was explaining why free markets didn’t work. Just as we were making real strikes forward in understanding the limitations of markets –
Alec Baldwin: Political forces were rowing the boat in the opposite direction.
Joseph Stiglitz: Exactly. And the increasing difficulty of getting the politics to move in that direction.
Alec Baldwin: But as you said the great challenge for you of the work you did was you said to sell these ideas to people. To go in and do the work and then have a chance to –
Joseph Stiglitz: And in democracy you have to do that, you know, I could know the answer. But unless I can persuade others, it doesn’t do any good. I believe very strongly that if we’re going to win this battle that I had begun when I was a young person at Amherst, one has to persuade others.
Alec Baldwin: We must.
Joseph Stiglitz: That these are real problems.
Alec Baldwin: Urgent.
Joseph Stiglitz: With the way of the market, they are urgent, and that we have answers. Maybe not perfect answers, but answers of things that we could do to make things a lot better.
Joseph Stiglitz has written more than 20 books including the forthcoming, "The Price of Inequality – How Today’s Divided Society Endangers Our Future." You can find more information on our web site, heresthething.org. I'm Alec Baldwin. Here's the Thing is produced by WNYC Radio.
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