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The end of neoliberal economic philosophy following the global financial crisis spells the need for a new international financial framework based on a new global reserve currency. Joseph Stiglitz interviewed in New York by Kiyoshi Okonogi.

5th November 08 - Kiyoshi Okonogi, The Asahi Shimbun

Link to Joseph Stiglitz policy discussion: Towards a New Global Economic Compact

Question: What are your thoughts on the global financial crisis, especially in the context of globalization? Is the crisis peculiar to the era of globalization?

Answer: It's very clear that we exported our "toxic mortgages" and that had we not done that the American downturn would have been worse. So we have suffered less, but the world has suffered more.

And what we now realize is that we've had global crises. The Great Depression was a global crisis, but it was a global crisis transmitted mainly through trade. This began with a crisis transmitted through financial markets. But we will begin to see the transmission of trade effects.

Neoliberalism is dead

Q: So how do you analyze the nature of the crisis? Some critics may say this marks the end of neoliberalism.

A: I'll say that it should be the end of neoliberalism. It should be the end of the view that deregulation and liberalization lead to economic efficiency. September 2008 should be to neoliberalism and market fundamentalism what the Fall of the Berlin Wall was to communism. Everybody understood that communism was flawed, but the Fall of the Berlin Wall defined it and made it clear. But most people understood that neoliberalism was a flawed idea. My own research explained it. Experience showed it. But this is the dramatic evidence that will make it very difficult for people to say, I believe in deregulated markets.

Q: How do you expect the crisis to develop? Will another Great Depression occur?

A: I think that the world of today is different from the world of 75 years ago. We have a more service sector-oriented economy. That probably means the unemployment rate will not get as high. More people will be part-time involuntarily. We're already seeing that. But there may be less massive unemployment.

Now, the full answer, of course, depends on what the government does. We are off to what you might say is a very strange beginning because the government has done a massive amount, but the design has been very bad. So we spent trillions (of dollars) around the world, but the money has not been well spent. So for instance, it's been very much a trickle-down ... throw enough money at Wall Street and some money will help the rest of the economy. I'm very pessimistic. It would have been worse if we had not done anything, but we could not have done much worse in the way we did it. It is badly designed.

Q: How do you respond to critics who say the massive bailout programs will lead to big government, smacking of socialism?

A: This is not socialism. Socialism cares about people. The Bush administration doesn't care about people. Socialism would begin by trying to take care of the people losing their homes, about the workers. This administration is what is called "corporate welfare-ism," not socialism. It's trying to help corporations, not people.

Q: Some say that Bush's "compassionate conservatism" has been generous for the rich only. What do you say?

A: It was compassion for the billionaires, but it wasn't conservative. "Conservative" means tradition. Throwing this amount of money at rich people is not "conservative." It had huge deficits. So it was neither compassionate, nor was it conservative. But it has helped unite America because almost all Americans now believe that Bush was wrong (laughter) for the first time. But they haven't figured out what to do about it.

Q: Do you think we can avoid another Great Depression, given the fact that, unlike the era of the Great Depression, the international community today has a number of means available to it, such as the deposit insurance system and ample liquidity provided by central banks?

A: I think we have the knowledge, the tools and the resources to do it. But we also have to remember that the U.S. Treasury and the International Monetary Fund (IMF) messed up very badly in the 1997-1998 financial crisis. We had the tools. We had the knowledge. We had the resources then, but what they did in Indonesia led to a massive collapse of the financial system and a deep depression. So you could say, we knew what to do, but special interests, Wall Street, prevailed over common sense.

Q: What do you think is imperative to ensure that common sense prevails?

A: It's very easy. We have been giving a massive blood transfusion to a patient dying from internal hemorrhaging. We need to do something very quickly about foreclosures. We need to do something about the ailing patient, the economy. We need to have a stimulus package. We need to restore confidence. We've given the banks more money, but we haven't changed their incentives. We haven't changed the regulations, the constraints. So we have to change the rules of the game.

Q: Should the U.S. government implement fiscal stimulus measures to prevent the crisis from becoming more disastrous? It seems that Federal Reserve Board Chairman Ben Bernanke has negative views on this point.

A: Bernanke has testified in Congress that we need a fiscal stimulus (package). So part of our problem is that (Treasury Secretary Henry) Paulson and Bernanke have lost the confidence of the markets and the American people.

Q: Will we see a further decline of the dollar in the future and will we see the advent of a dual-currency system?

A: It's clear that the role of the United States, as a reserve currency (nation), maybe even the role as the (world's primary) financial market, is going to be diminished ... still there, but it will be diminished.

But I've argued in my book "Making Globalization Work" that moving from a dollar reserve to a two- or three-currency reserve, would lead to a more unstable system. We need a global reserve system, and that's what I advocate in the book.

We need a multilateral system that doesn't depend on any currency. If you have two, then if there's a problem in the United States, everybody will run to the euro. And if there's a problem in Europe, everyone runs to the United States. You'll get a lot of volatility.

'Bretton Woods moment'

Q: Are you saying that we would need a "currency basket" in order to secure stability?

A: (What is needed is) Bringing all the currencies, like the SDRs (special drawing rights), but SDRs have only been periodic. Make this more permanent.

Q: At the famous international economic conference at Bretton Woods, New Hampshire, in 1944, which established a postwar global monetary and financial order, John Maynard Keynes, who represented Britain, proposed the creation of a world currency unit called the Bancor. Are you talking about a similar type of currency basket? Would that be the kind of "basket" you had in mind?

A: Exactly, in my book I argue that that's what we need. It's a multilateral system. We need to have a new institutional framework and that's why I'm hopeful that there's the beginning of a discussion to have an international meeting, and that's one of the things I hope will come out of that.

Q: Do you think we need a second version of the Bretton Woods conference?

A: This is a "Bretton Woods moment."

Q: But, who should be held most responsible for the current global financial crisis?

A: Well, the first responsibility lies with the financial sector, the bankers ... and the mortgage lenders. Clearly, the second are the regulators for not stopping the greed. And then there are what I call the "accomplices," the rating agencies. And underneath it all was the Bush deregulatory philosophy. It wasn't free market economics, but it was this corporate welfare-ism defended through language of free market economics.

The Fed is very responsible for the loose monetary policy. The loose monetary policy combined with the lax regulation, was lethal, toxic, explosive.

I also blame the Bush administration in two ways. The war (in Iraq) weakened the economy. The tax cuts for the rich weakened the economy, and that shifted the burden from fiscal to monetary and encouraged the Fed to have lax monetary policy. So the Bush administration plays a very strong responsibility, both in terms of the philosophy but in terms of the particular actions ... the tax cuts and the war.

Q: What kind of fiscal stimulus should be implemented? Something like a new version of New Deal Policy?

A: The first part is to prevent things from getting worse and that's aid to states and localities that are about to cut back. Aid to the unemployed that are about to cut back. So that's the first. The second is to get the economy recovering. We're going to have massive infrastructure. And the third that we'll probably do, may be special programs to help the foreclosures. And then a fourth is moving forward the tax cuts that were planned, but making them a little faster.

Q: When you talk about infrastructure, this used to refer to highways and bridges and huge dams. What would you say to investment geared more toward such pressing issues as addressing global warming?

A: You do a lot of that ... highways. Nancy Pelosi, who is the speaker of the House, very much wants to use Green technology. What the Democrats want to do is to reinvent America's economy to make it Green. There's a broad consensus in the Democratic Party to use this to Green America.

So I think that's one of the areas where there's a lot of enthusiasm. And many people think that it will pay another dividend, that we will get, technologically, ahead of the world and then we will have a market that we are behind and we want a massive program in research to put us ahead.

New engine of growth needed

Q: What do you think of Japan's role in this crisis?

A: Japan has affected many people's thinking about the crisis because we don't want to have 10 years (laughter). It was too long, so we have to act quickly. So many people have said, Japan was too moral. It worried about "moral hazard," doing the right thing. So, (it's) more important to get the economy going than to punish the bad guys. I think we should do both. But you should have more accountability. What we did was very bad compared to the U.K., where they fired the heads of the banks.

I think everybody recognizes that in the world of globalization it's very important for old sources of demand to keep going. And in a way, the United States used to be the consumer of the world. We consumed too much. So it will be very important for the world, for there to be a more diversified "engine of growth." So Japan has to grow strongly, and so they need to make sure their economy is growing as fast as it can.

Q: Do you expect a major change following the presidential election?

A: There's going to be a very big change. But the most immediate problem is we have a crisis and we have a president that is a lame duck that both parties reject. Both John McCain and Barack Obama have explained that they don't want him. But he's still the president.

So, for instance, the problem is that we're going to have a G-20 meeting to discuss global financial architecture in Washington (on Nov. 15), but the leadership is a president that nobody respects. It's very difficult ... and a secretary of the Treasury that most people don't respect.

Q: So, you think the new Bretton Woods conference must be held in a new style, probably next year?

A: Next year. So I think there is an incongruence. We have to act quickly, but we can't. And there may be many problems that happen in the next two months. The new president doesn't take office until Jan. 20, and so that's still three months away.

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