Two time Nobel-prize winner and former chief economist of the
World Bank, Joseph Stiglitz has warned that the current financial
crisis will continue for at least another eighteen months and
in many ways represents a worse situation than the one faced by
Americans during the great depression of the 1930s.
"You can paper things over for a while but
eventually you have to face reality." Stiglitz told the nationally
syndicated Alex Jones show yesterday.
"This is clearly the most serious problem since
the great depression and in some ways worse in terms of the financial
institutions." Stiglitz commented, referring to the fact
that lenders are unwilling to take risks to finance each other
because they no longer have complete access to their own undertakings
let alone those of other institutions.
"The reason, in part, is that while some of
the same problems that occurred during the great depression and
have occurred since, such as excessive leverage, pyramid schemes,
bubbles, have happened before, the so called innovation of Wall
Street, the financial innovations, that were supposed to manage
risk, created a kind of non transparency that is now so great
that no one knows exactly the magnitude of the risk they face."
"It is particularly bad because our financial
institutions are based on trust, you put the money in the bank
and you trust that you can get your money out, so trust is absolutely
essential for the functioning of our financial markets and the
functioning of our economy." he continued.
"The problem is that much of the news on what
is going on in the financial markets comes from those who are
making money out of the financial markets. So if you were one
of the people involved with Lehman Brothers or AIG, you're going
to be talking up the economy. The head of Lehman Brothers was
quoted last April as saying we have turned the corner, the economy
is on the uptick. And the same thing goes for the president and
the secretary of treasury."
"The fact is that they are involved in salesmanship."
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Describing the current situation as a "top
down crisis", Stiglitz also cited the $3 trillion cost of
the Iraq war as a key factor in the economic downturn, saying
it has increased the budget deficit and consumed resources that
would otherwise promote growth.
"This is the first war in American history
that has been totally financed on the credit card... For the last
five years as the war has gone on we have been a debt economy.
It is the first war since the revolutionary war that we have had
to turn to foreigners to finance, 40% of our national debt is
now being financed by foreigners... Even as we went into the war
we had a big deficit, and yet the president called for tax cuts
for upper middle class Americans." he said.
"And there is another level of trust, those
in other countries have to have trust that the American economy
is working well, they have to trust that when the president says
everything is going well, it is. This administration has really
burned that trust, the president said there is no problem, there's
just a few too many houses been built. Well if that is the level
of analysis the Untied States is giving about the nature of its
economic problems, no wonder everybody around the world is losing
Stiglitz is no stranger to positioning himself in
opposition to the establishment on the economic front. In October
2001 he caused controversy when he exposed rampant corruption
within the IMF and blew
the whistle on their nefarious methods of inducing
countries to fall under their debt before stripping them of sovereignty
and hollowing out their economies.
"It is clear that the Bush administration is
not responding to these problems, partly because the problems
are of their own making." Stiglitz asserted.
Over the next twelve months, Stiglitz predicts that
house prices will continue to fall, more mortgages will go into
foreclosure and more financial firms will be put into crisis.
"I am particularly worried about what I call
the 'real economy'. Basically when the financial system starts
getting weak, it is not in a position to provide credit, to provide
loans, to provide mortgages and that means in turn that housing
prices are going to fall further, businesses are going to contract,
unemployment is going to grow and it is a downward vicious cycle...
I don't want to be obsessively pessimistic but you have to be
in fantasy land to say that everything is fine, and even to say
that we have turned the corner. We're still in the downward phase
of this economic cycle. We should not anticipate emerging from
this for a year and a half or longer."
In a long term prediction 22 months ago, Stiglitz
told listeners of the Alex Jones show that he believed
a global economic crash would occur within 2 years.
With major financial institutions now folding every week, others
touting mergers just to stay afloat and stocks continually plummeting
on a daily basis it seems that prediction is coming to pass.
Stiglitz stressed that in order to emerge from the
crisis, the economy needs a stimulus, that really works, consisting
of increased aid for local government, stronger unemployment insurance
and more investment in infrastructure.
"I would take advantage of this particular
time in order to stimulate our economy in ways that provide the
basis of our longer term economic growth. If our economy is growing
then we will be better able to manage some of this financial turmoil."