Joseph Stiglitz on the State of the US and Global Economy

By Democracy Now · 21 Oct 2010

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Picture: Democracy Now
Picture: Democracy Now

As the Obama administration rejects a foreclosure moratorium and austerity protests grip Europe, Amy Goodman of Democracy Now assesses the state of the US and global economy with Nobel Prize-winning economist Joseph Stiglitz, author of Freefall: America, Free Markets, and the Sinking of the World Economy.

Stiglitz backs calls for a foreclosure moratorium and says opponents of a new government stimulus "don’t understand basic economics." On war, Stiglitz says Iraq and Afghanistan are "the first wars in America’s history financed totally on the credit card."


AMY GOODMAN: Federal law enforcement officials are launching an investigation into possible criminal violations of US law by banks and other financial firms involved in the foreclosure crisis. The multi-agency task force on financial fraud, led by investigators in the Justice, Treasury and Housing departments, are exploring whether banks broke the law and misled federal agencies when using fraudulent documents to foreclose people’s homes.

The federal probe coincides with an effort by investors to hold firms accountable for selling securities composed of improperly serviced mortgages. Late Tuesday, a consortium of eight investors, including the Federal Reserve Bank of New York, demanded that Bank of America buy back some $47 billion worth of troubled home loans packaged into bonds by Countrywide Financial, which is owned by Bank of America. The New York Fed is also considering suing Bank of America.

The inter-agency federal investigation was announced a day after Bank of America and GMAC Mortgage said they’re resuming foreclosures in the twenty-three states where a court’s approval is needed to foreclose. Ten days ago, Bank of America had imposed a nationwide halt on foreclosures following revelations employees at several lenders had approved thousands of foreclosure affidavits and other documents without proper vetting.

On Tuesday, White House Press Secretary Robert Gibbs said the Obama administration is committed to holding banks accountable for any legal violations tied to foreclosures.

PRESS SECRETARY ROBERT GIBBS: Our concern has been ensuring that the process adequately complies with the law. That’s what led—like I said, that’s what led FHA to get involved in this. That’s what’s led the Financial Fraud Enforcement Task Force to be involved in this process, as well as our support for fifty state attorneys general ensuring, again, compliance with the law. Obviously, they have certain requirements in the law that have to be met, and if they’re not meeting those requirements, they certainly can face fines from us and they can face legal action from homeowners.

AMY GOODMAN: Well, members of President Obama’s Financial Fraud Enforcement Task Force and other administration officials are scheduled to meet today to discuss the foreclosure crisis.

For more on the state of the economy in this country and around the world, I’m joined here in New York by the Nobel Prize-winning economist Joseph Stiglitz. He’s a professor at Columbia University and the author, most recently, of Freefall: America, Free Markets, and the Sinking of the World Economy. It’s just out in paperback.

Welcome to Democracy Now!

JOSEPH STIGLITZ: Nice to be here.

AMY GOODMAN: OK, let’s start with foreclosures. What do you think needs to be done? If you were in that room today in Washington, DC, what would you say?

JOSEPH STIGLITZ: Well, first, I’d begin with the problem of so many Americans owing more on their homes than the value of their homes. We have to put this in context. The mortgage companies, the banks, engaged in predatory lending practices. They weren’t asking what was the best mortgage for these homeowners; they were asking what was the mortgage that generated most fees for me. The way the mortgage system worked, they could take bad mortgages, sell them off to investment banks that would repackage them and sell them on to other people. That’s the other part of the story that you were talking about, where PIMCO, Federal Reserve, all these people who have wound up with these securities, say, "You gave us a lot of junk." So, it’s all the way along the pipeline that there has been fraudulent behavior, all the way from the foreclosures that you were talking about, but really going back to the creation. So, in my mind, what we should begin is trying to protect Americans.

So, we ought to have a homeowners’ Chapter 11. Let me explain what that idea is. You know, when corporations have trouble paying what they have to pay, what we say is we can write down the debt. It’s so important to keep those enterprises going, keep the jobs, keep the suppliers going, that we allow them to write down the debt and restructure. Well, keeping American families going is even more important, I think, than keeping corporations going. So, that should be part of the philosophy, that we ought to say, look at, the banks were really derelict in the loans that they made. They should have known that there was a bubble going on. I certainly talked about it; other people talked about it. They were really engaged in predation. So let’s use a homeowners’ Chapter 11 that allows a speedy write-down of what is owed, converting some of the debt into equity, so that when they sell the loans sometime—when they repay—sell their house sometime in the future, if the market recovers, some of the capital gain will go to the bank. But meanwhile, the payments that the homeowners will have to make will go way down. And that will mean that they can stay in their home. And that will be good for the families. It’ll be good for the communities. When people are thrown out of their homes, it’s bad for the family, it’s bad for the community. And we have this, you know, real evidence that our market system isn’t working when we have empty homes and homeless people. That’s not the way a market economy is supposed to operate.

AMY GOODMAN: Would you support a foreclosure moratorium?

JOSEPH STIGLITZ: Well, I think probably the answer is yes. The fact is that they’ve generated so many bad mortgages, so many fraudulent mortgages. And by the way, this problem of fraud has been known for a long time. The FBI started reporting on this years ago. I talk about that problem in my book. It’s not just risky lending. It was fraudulent, predatory, all these—and so, we have a backlog now. And we shouldn’t be surprised that our legal system is not capable of processing the numbers of foreclosures that have to be processed. We’re talking about probably something in the order of magnitude of three million, three-and-a-half million foreclosures actions this year. Last year, the estimate was about two million lost their home; the year before, two million. Our system isn’t geared to do that.

But there’s a more—there’s a deeper point that I’d like to raise, which is the following. You know, in a democracy like ours, people have to have confidence in the fairness of our legal system. And if they feel that the legal system is stacked against them, then voluntary compliance—our whole social fabric starts fraying. And I think a lot of Americans have come to the view that the system is stacked against them. It began, in a way, with the bankruptcy law that was passed back in 2005 that, in effect, reintroduced bondage in America. I mean, people haven’t realized how bad that law was. If you owe a hundred percent—you know, amount of money that’s equal to a hundred percent of your income—you have a $40,000 income, you wound up with a credit card debt and other debt of $40,000—for the rest of your life you may be working 25 percent of your time for the banks. The way it works is very simple. They can take 25 percent of your income—you know, it used to be easy that you could go bankruptcy and you get discharged of the debt. They made it very difficult. So, you can pay 25 percent of your income every year to the bank, but then the bank can charge you 30 percent interest. So, the end of the year, you owe more money than you did at the beginning of the year, even though you gave 25 percent of your income to the bank. Now, this is an example of something that is clearly socially unjust.

AMY GOODMAN: This was passed when the Republicans were in control.

JOSEPH STIGLITZ: That’s right.

AMY GOODMAN: And this was 2005.

JOSEPH STIGLITZ: That’s right.

AMY GOODMAN: Now, we’re talking about foreclosures by banks, and which President Obama is not for a nationwide foreclosure moratorium. But even the government, it is the largest foreclosure entity out there, according to Bruce Marks of NACA, a housing activist. FHA mortgages, government-owned, are doing massive numbers of foreclosures; Fannie Mae, massive numbers of foreclosures, he said. So he said President Obama maybe doesn’t want to do a full moratorium. But why not make the government-owned entities, the ones that the taxpayers own and control, let’s start with them?

JOSEPH STIGLITZ: It actually makes sense for our economy. And let me explain why that is, because when you dump all these mortgages, these houses, onto the market, it depresses the prices, and that means that the real estate market is destabilized. One of the advantages that the government has is that it can and should take a longer-term horizon. It should realize that if it holds onto these a little longer, provided it can maintain those homes, then it’s a lot better as an owner of the home. They don’t have to be shortsighted in the way the banks are so shortsighted. So, in a sense, it’s even good economics for the taxpayer. And again, it goes back to the point I made before. It makes absolutely no sense in our economy to be creating homeless people, throwing people out of their homes, disrupting the education of their children, undermining the communities, and at the same time, having these empty homes. What really happens, when you throw people out, very quickly the house debts starts to get wasted.

AMY GOODMAN: And this, of course, affects these midterm elections. If President Obama cares about Democrats controlling the House and the Senate, this is the major issue, is the economy, jobs, foreclosures. And yet, they constantly—just in the last few days, David Axelrod, the White House adviser, speaking for the President, says there are in fact valid foreclosures that probably should go forward. HUD, they’re saying the same thing. Where do people gain any confidence that the President, who said he was taking on the big corporations, cares more about them than the banks?

JOSEPH STIGLITZ: Well, you know, one of the key words here that you said is "valid" foreclosures, because we believe we have a system with a rule of law, but what we have to recognize is that there was fraud all along the line. They were creating these mortgages at such a rate that the documentation wasn’t done well.—they were creating these mortgages as such a rate that the documentation was not done well, that we know there are lots of instances where—when the people went into the final signing of the mortgages, the income that was stated was not the income that the person told them. And then they would say something, "Oh, don’t worry, that’s a technical detail." So, is that a valid mortgage or not? The fact was, it looked like the documentation was right, but in the creation of the documentation, there was fraud. Now, we were manufacturing—or the financial sector was manufacturing bad mortgages at such a rate that, literally, it’s extraordinarily difficult to tell, at this juncture, what is a good mortgage and what was not. When there was misrepresentation to the borrower, is that valid or not? And so, I think we have to recognize that this process, from 2003, '04 on, was just rife with these problems. And it allowed the banks to book high profits then, and now the key issue is they don't want to admit the losses that are associated. And that’s really what the battle is about.

AMY GOODMAN: We’re talking to Joseph Stiglitz, Nobel Prize-winning economist, professor at Columbia University. His book is just out in paperback; it’s called Freefall: America, Free Markets, and the Sinking of the World Economy. If you want to join in the discussion, you can send in your questions at Facebook, We’ll be back in a minute.

So, just to summarize, you are for a national moratorium on foreclosures.

JOSEPH STIGLITZ: I think—inevitably, I think we have to be moving towards that. And the reason is very simple. There were such—the bad practices were so rife, the inequities were so rife, the fraudulent behavior was so common, that at this point we don’t know what is a valid mortgage and not. And the consequences of throwing somebody out of their home, when they shouldn’t be, are hard to reverse. I mean, just imagine what it does to the family— education of the kids are interrupted—what it does to the community. So, when we have to balance the injustices—and life is unfortunately always balancing one side versus the other—and where will their mistakes be easily reversed and where not? My view is, if we keep them in the homes for a little longer, they owe the money—they still owe the money, that doesn’t let them off the hook—but what we’re saying is we’re not going to speed up this process of—where there’s the serious risk of an inequity that will not be easily compensated for.

AMY GOODMAN: Joe Stiglitz, the deficit, the battle cry of the Tea Party movement, of the Republicans, as well. Robert Rubin has weighed in, says any new stimulus plan is highly likely to be counterproductive. What do you think has to happen? Does the deficit matter? And how do you think it should be dealt with?

JOSEPH STIGLITZ: My view is we cannot afford not to stimulate the economy. So, you know, anybody that says we should go back to austerity or we should not have a second-round stimulus just doesn’t understand economics. And let me be very clear about this. If we don’t stimulate the economy, the economy is going to get weaker. When the economy gets weaker, tax revenues go down and expenditures go up. Already, more than 40 million Americans are on food stamps. Number of people on Medicaid is reaching record levels. So, revenues go down, expenditures go up, deficits get worse. If you stimulate the economy, then people get jobs, they spend money, tax revenues go up. Now, if we spend the money on investments—investments in education, technology, infrastructure—you grow the economy in the short run from the stimulus, you grow the economy in the long term because of the returns that you get on these investments.

I mean, just think about this from the point of view of a firm. If you are a firm and you could borrow at zero to two-and-a-half percent, which is what the government can borrow, and you have investment opportunities that you owe ten, 15, 20 percent, you would be irresponsible, you would be foolish, not to undertake those investments. So, anybody that says, "I’m going to only look at one side of the balance sheet, the liabilities; I’m not going to look at the other side, the assets," is really not understanding economics. It’s that kind of reasoning that got our country in the trouble in the first place, the people who didn’t—you know, shortsighted behavior of the banks that got our country in trouble in the first place. And to me, I just view t

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