Economist Joseph Stiglitz says everyone would be hurt if nothing is done

60_minutesstiglitz

"Worst Case Scenario"
      

Originally broadcast: 60 Minutes – Sun Sep 28,  7:00 PM ET      

Category: Bailouts, Credit, Derivatives, Economy, Video

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

35 Responses to “Stiglitz on Worst Case Scenario”

  1. CNBC Sucks says:

    Thanks, Barry. Being a Democrat now, I am a little bit more at ease hearing that from Stiglitz. But I still worry that the Democrats have bought into Paulson hook, line, and sinker and will fall into a political trap Wednesday night that could cost some Senate seats or even Obama the Presidency. I am also worried about how much the bailout will hamstring Obama from moving forward on his energy independence platform.

    It’s out of our hands. I don’t really have a position on this bailout anymore, because I am tired of worrying about it. Let the chips fall where they may.

  2. whippersnapper says:

    I hear a Steely Dan refrain accompanying the bailout – “See the glory … Of the royal scam”

  3. AGG says:

    Barry,
    Thanks for staying on top of this boondogle. I just read that they’re making serious sausage in the senate. They’re throwing AMT adjustments as crumbs to the middle class and a bunch of UNFUNDED infrastructure crap. These clowns really want to trash the dollar. I hope Leahy isn’t part of this but he’s bent over for his precious machine gun factory in Burlington before so they may have ways of forcing him. Sanders should hang tough though.

  4. beanieville says:

    The bailout needs to happen. No ifs ands or buts about it.

    Just get it done and get it approved.

    There’s just too much at stake here to fiddle around with other alternatives. There are no alternatives.

    Don’t trust Paulson, Benanke or Wallstreet if you don’t want to, but at least trust Warren Buffett. If there were a better alternative, he would have said so.

  5. Lovehate Punchkick says:

    Hey, here’s an idea! Let’s create a Neo Department of Home and Financial Security, and sink another $T a year in baaksheesh ransom into the black hole of NYC:WADC! Does anyone have any conception just how upside down we are as a society?! Never mind buying up all their nuclear waste, we’re already glowing in the dark, a deep blood red. What’s another $T, when you’re down by the bow, black icy waters of usury caving in the last bulkheads of freedom before the banks and brokers end up owning everything and selling our children off to our foreign landlords.
    http://www.arthurmag.com/magpie/?p=3160

  6. Nathan Smith says:

    Everyone will be hurt anyways. By opposing the bailout people don’t want to make it worse.

  7. beanieville says:

    Nathan,

    Give me a freakin break. I never heard a bull say it’s a bad thing. All the negativity came from the bears. *sigh*

  8. Nathan Smith says:

    This situation is far beyond petty partisan trading preferences.

    The American people clearly don’t like being tricked into major financial decisions through threats and fiat. Good for them. I hope their representatives are listening.

  9. HCF says:

    I am very much against virtually any mainstream bailout proposal I’ve heard. As I see it, you win, then good for you; you lose, then sorry, but thanks for playing.

    With that said, why has no one proposed something like this, which is purely based on helping the main street crowd:

    1) Take the $700 billion (or whatever you’d like) and create “n” number of banks from scratch (say n ~ 10; definitely greater than 7 and less than 50). These would be funded by the government, but not BACKED by the government and initially serve a population and/or area that is equal to 1/n of the country. Each would be run independently
    2) Hire talented people by giving options/restricted stock/partnership in the company they join. Give the fed. government say 79% ownership, state government 10% ownership, and the rest to workers and executives at new companies.
    3) Give autonomy to the leadership at the companies (i.e. government is passive investor)
    4) Give the companies two mandates: maximum leverage of y:1 (y=10?? perhaps) and must invest at least X% of total capital at a given time (i.e. they can’t horde all the money in treasuries while government owns majority stake!!!). Each company should diversify between small business loans, short term money market operations, and perhaps underwriting municipal debt. This should be profit motivated, not for charity.
    5) Each company must go public or unwind positions and close by some fixed date (say 7 years): this can be staggered
    6) Government must divest large majority of it’s interests in the firms by some fixed time (20-25 years), hopefully earlier. (Maybe set profit goals at which the government must divest small chunks along the way)
    7) These firms may not merge with each other until completely privitized (no Fannie or Freddie!)
    —————————————-

    I think this plan is the least reprehensible for a few reasons.

    1) Well capitalized, new banks can borrow cheaply at today’s rates, without legacy debts, and cherry-pick the best deals in an otherwise frozen market. This directly helps main street, small business, and the average guy trying to get ahead by innovating and creating new jobs

    2) n-number of firms ensure no great concentration of power in any one firm. They will initially have unique footprints, but eventually compete against one another

    3) No bailout for current firms who are in trouble: This plan doesn’t retard price discovery and forces firms to breakup, merge, or die as necessary

    4) At the same time, this would return confidence that the system itself would not fail. At least n-number of institutions will and MUST lend to qualified borrowers.

    5) Government intervention actually has a CHANCE of returning on the public investment and by mandate, the firms cannot be permanently a GSE.

    6) This is a “free-market” approach. Other than initial government funding, and the two mandates (max. leverage ratio, min % of capital must be lended out), companies must be run for the purpose of long-term profit. Executives and workers will be compensated with equity that will pay off to them if they do their jobs well! (Make sure to have compensation claw-back provisions in case someone blows up one of these firms!)

    Alright, I guess these are the crazy ideas I come up with when I’m jet-lagged and can’t fall asleep! I guess I was getting sick of just criticizing the bailout without having at least some form of idea. In all fairness, it’s not TOO much more insane than what’s going through the House and Senate.

    HCF

  10. Blackhalo says:

    “The bailout needs to happen. No ifs ands or buts about it.”

    Why? I am willing to take some short term hurt in exchange for some long term fiscal conservatism. A bonus would be if the people who lent money to those who could not afford and those who borrowed more than they could afford get hurt worse.

  11. RFT says:

    Most of the approaches proposed/adopted are wrong, and average Joe received the stick on the way up, on the way down, and now at the bottom. For instance, there is something fishy in this credit crisis. Mortgages are supposedly the reason why banking institutions are down. Further it is typically stated that they are worth only 20 to 30 cents on the dollar.

    If this were really true, I (and many others I am sure) would love to buy back my personal mortgage which is supposedly trading/worth right now somewhere in the area of 20-30 cents on the dollar. I would even like to buy the mortgages of others.

    But they will tell you NO NO NO.

    A MUST READ article

    http://financialtraders.blogspot.com/2008/09/lessons-from-aig-insolvency-leh.html

  12. Blackhalo says:

    “I think this plan is the least reprehensible for a few reasons.”

    This idea is smart and appealing and may be the best bet for meeting the stated goals of the bailout (but not the real goals). But I have issues with it for some key fundamental reasons.

    A) It really is socialism.
    B) Good banks that did not participate in the bad behavior that is hurting the bad banks, would be negatively impacted by competition with the government banks.
    C) Moral Hazard. Good banks do not get to benefit from their good behavior over the past few years. They do not get to win the rewards of responsible lending and grab the market share that will be left behind when the bad banks die.
    D) It is not yet the time for government action. Housing needs to find a bottom and the bad actors need to fail before government intervention should start. It is bad policy to attempt to re-inflate a deflating bubble. It is a waste of money to do so. Government funds are best spent accelerating a recovery rather than preventing a downturn.
    E)Housing prices and cost of living are still too high. Once prices reach 2.5x income, I could see justification for action, but we are not there yet.

  13. AGG says:

    Do not be fooled. The $700 billion (ultimately $1 trillion or more) bailout is not predominantly for mortgages and homeowners. Instead, the bailout is for mortgage-backed securities. In fact, some versions of these instruments are imaginary derivatives. These claims overlap on the same types of mortgages. Many financial institutions wrote claims over the same mortgages, and these are the majority of claims that have “gone bad.”

    At this point, such claims have no bearing on the mortgage or housing crisis; they have bearing only on the holders of these securities themselves. These are ridiculously risky claims with little value for society. It is as if many financial institutions sold “earthquake insurance” on the same house: when the quake hits, all these claims become close to worthless — but the claims are simply bets disconnected from reality.

    Follow the money. Average Joes and Janes are not the holders of the other side of complicated, over-the-counter derivatives contracts. Rather, hedge funds are the main holders. The bailout will involve a transfer of wealth — from the American people to financial institutions engaging in reckless speculation — that will be the greatest in history.

    Rescuing financial institutions is not the best solution. Yes, banks are needed to provide capital to businesses. But it is not necessary to spend $1 trillion to maintain liquidity. If the government is to intervene, it should pick and choose which claims to purchase; claims that are directly tied to mortgages would be a good start.

    Let financial institutions fail, merge or be bought out. The faltering institutions will see their shares devalued and will be likely to be taken over by stronger institutions — as has already started happening. This consolidation of the financial sector is both efficient and inevitable; government action can only delay the adjustment.

    The government should not intervene. It should leave overleveraged financial institutions to default on their derivatives obligations and, if necessary, file for bankruptcy. Much of the crisis has arisen from miscalculating the risks involved in a large book of positions in these derivatives. It is only logical that these institutions pay for their poor management.

    Rather than bailing out Wall Street, we propose that the government should buy up the actual mortgages in question and do nothing else. The government should not touch any derivatives; that is, claims that do not directly tie into the actual mortgages. If money becomes too tight, then the Fed can certainly increase its loans to financial institutions.

    Let the poorly managed, overly risk-taking financial institutions fail! Always remember that Wall Street and the real economy are not the same thing.

    — Ari J. Officer has completed his master of science degree in financial mathematics at Stanford University. Lawrence H. Officer is a professor of economics at the University of Illinois at Chicago.

  14. Rob P says:

    I’ve said it before and I’ll say it again, “It’s not an issue of banks not lending to each other. The issue is that they aren’t lending to each other CHEAPLY!” What happened to all that liquidity that was sloshing around last year all around the globe? When business’s get hungry they will pay for what they need and not necessarily what they want.

  15. JustinTheSkeptic says:

    Bob P., yes those higher interest rates are there for a reason. Markets Work!!!

  16. Steve Barry says:

    I agree with him something must be done…there would be a revolt in this country if nothing is done and we have a Depression. I’ve said it before…if you are down 6 points with 5 seconds left on the 40 yard line, you throw a Hail Mary pass. It will likely fail, but you tried.

    Don’t assume that “if nothing is done, we collapse, therefore if something is done, we don’t collapse.” That is faulty logic…we could STILL collapse if the plan is bad…and a bad plan can make potential recovery that much harder. That’s why I have repeatedly called for a true team of experts to help form policy, not Paulson, Congress and the Fed. I have received an encouraging note from BR that he might actually be considering my idea!!

  17. matt says:

    Everyone is going to hurt whether or not this bailout happens. This bailout is just another golden parachute. The super wealthy are the ones screaming loudest about this for a reason–they are the ones who stand to benefit. The average American, with his zero savings and pile of debt won’t be any worse off without the bailout.

  18. AGG,

    Don’t you know it, this ‘Bail-Out’ Plan is all about MBS, that steaming pile of yesterday’s/year’s Powerball Tickets that were only printed with 4 numbers to begin with…

    truly, another Front in the multi-spectrum War on the ‘Cained Peep.

    all these Threats, amounting to: “More Gov’t Debt/Spending, or no more ‘Personal’ Credit” have been obvious from the drop.

    There’s no way We can accede to this Deal, it’s a Sham.

  19. Ken H. says:

    What’s laughable to me is that we have the very people who told us Fannie and Freddie were just fine 4 years ago leading the charge for this, Frank and Dodd. Unbelievable!

    There is going to be some major unrest when this passes. They can spin all they want but J6P is pissed!

    No way I vote for these two parties. Idiots!

  20. batmando says:

    “Don’t trust Paulson, Benanke or Wallstreet if you don’t want to, but at least trust Warren Buffett. If there were a better alternative, he would have said so.”
    Posted by: beanieville | Oct 1, 2008 1:12:59 AM

    Yes, BUT….,
    Why should the American taxpayer receive a deal any less favorable than Buffett? Warren did NOT buy toxic ‘assets’, did he? Didn’t he buy warrants with 10% interest? If it’s good enough for Warren, it’s good enough for us. With warrants toxic MBS, derivatives, etc. would stay on the balance sheets of the last, greatest fools who bought them. The ones who work it off will be rewarded as will we. Those who don’t will share the pain with us.

  21. Patrick Neid says:

    Boy here’s a impartial view of things from 60 minutes, let’s bring on Joseph Stiglitz. Yes that’s right that Stiglitz who never met a government intervention in the market that he didn’t like. To boot he’s an advisor to Obama.

    Yes it’s all gloom and doom without this bailout. Oh really?

    If 60 minutes wasn’t selling snake oil it would have brought on someone neutral or at least with an opposite position instead of a political economist selling his previously held positions. I’m surprised they didn’t spin off into his global warming fears.

    That will be next week.

  22. Marcus Aurelius says:

    Hell, if we’re going to throw a hail mary (setting aside the chance that what we are throwing is a grenade – not a football), we might as well go whole hog and bail out the middle class. Let’s use our fiat to do what it does best: Create phony wealth.

    Here’s my bail-out proposal:

    $3 million stimulus check to every taxpayer not currently in possession/control of that amount (hey – it’s fiat – nothing is stopping us). Taxable as income. Fixed prices on US made goods and US-based assets for 2 years (excluding services and intellectual property). we pay off mortgages, buy cars and flat-panel TVs, and consume like crazy. The FedGov uses tax receipts to pay down the debt.

    This is a plan the majority can get behind. Let the party begin.

  23. Steve Barry says:

    Marcus:

    I like the way you think…really highlights the beauty of fiat currency. I think your plan breaks down when every other merchant violates the controls and jacks up prices…also, many will take the money and quit their jobs…heroin prices will also skyrocket.

  24. D. says:

    The only way you can get out of this hole is to keep leverage flat or increasing.

    That ain’t going to happen.

    Even if leverage stays flat, many industries will collapse because their stock price valuations are based on growth.

    Just go look at all the Small Business stories on CNN Money; if it had not been for the credit bubble, they wouldn’t have existed in the first place!

    This is like a flu. You can take Tylenol, cough drops and chicken soup to dampen the symptoms but at the end of the day, you just have to bide your time.

  25. wally says:

    Stiglitz is being less than honest when he says everybody will be hurt. The implication made by that statement is that the giveaway bill, or one like it, will therefore keep everybody from being hurt and that is not the truth.

  26. beanieville says:

    ok homies.

    You think congress conjured up some hocus pocus $700 billion idea just to embarress itself because it won’t work.

    C’mon man, it’s not the best package out there but it’s the best we have now. And Warren Buffett agrees.

    Get off the pipes, people. You’re smokin too much of those skunk powder.

    Get it approved!

  27. dmc says:

    Trust Warren Buffet? I would rather trust Professor Irwin Corry’s opinion, or Bozo the Clown. Buffet is hopelessly compromised in this situation with a $5B conflict of interest. Stiglitz is the typical liberal Dem hack economist. The plan is still a crazy bailout for banksters, will do little to stem the financial tsunami on it’s way, and gives Emperor like powers to the Treasury Secretary, in this case another totally compromised player. It’s insane and could never pass without the “sky is falling” shock tactics or a hopelessly compromised Democratic leadership in the Congress. dmc

  28. me says:

    “but at least trust Warren Buffett. ”

    Give me the same 17% guaranteed return Buffet got out of GS and I’m in. Otherwise I don’t trust him either. Why don’t you trust William Poole?

  29. me says:

    “I’ve said it before and I’ll say it again, “It’s not an issue of banks not lending to each other. The issue is that they aren’t lending to each other CHEAPLY!” ”

    BINGO we have a winner! Way to go Rob P

  30. Jeff M. says:

    Nathan,

    Give me a freakin break. I never heard a bull say it’s a bad thing. All the negativity came from the bears. *sigh*

    Posted by: beanieville | Oct 1, 2008 2:02:58 AM

    **Sigh**. Not sure what your definition of a “bull” or “bear” are, but I’m mostly “long” and I opposed the bailout (handout) in its current form. Am open to changing my mind if they could make some changes to the bill (see Iceland’s recent bailout of Glitnir for reference) and if/when our government gets serious about truly addressing the concerns of average people instead of powerful corporations. Until then, I say “Nyet” to the handout.

  31. Dan says:

    Interesting opinion piece in today’s WSJ for all of you who lay primary blame at Democrats for this debacle:

    http://online.wsj.com/article/SB122282690823092989.html

  32. Mark W says:

    The bailout needs to happen. No ifs ands or buts about it.

    Just get it done and get it approved.
    ___________________________________

    I thought this was all about improving liquidity so that the banks would lend again. So why is it that the $630BB that the fed just dumped into the system prior to the vote didn’t even cause a ripple in the pond (markets tanked and the LIBOR is through the roof).

    We’ll all feel good for trying to do something, but we’ll end up wasting an insane amount of money for nothing and still wind up stuck in the same ditch anyway. Except that we’ll will have trashed the dollar and monetized our debt through multiple $700BB flushes of various asset blocks. Paulson, bernanke, Bush and most of the Senate and the Houe should be boiled in oil on Pay Per View.

  33. Mark W says:

    Barry,

    I would be interested in your thought as to Mish’s and Denningers posts today. Namely that the key provision to this entire bill (and one that without its inclusion Paulson is to have said will get the bill veto’d) is the allowance of foreign owned assets to be sold to their US counterparts and then bought by Paulson.

    The implication seems to be that Paulson is getting mad pressure form these foreign central banks for relief from the bad MBS paper our IBs sold them. Could be a “take it back or no more Treasury auction purchases” kind of show down. Which also explains all the foreign bankers chirping about the bailout not being passed. Paulson could be facing a pass it or else we’ll be bankrupted kind of scenario.

    Even if true, it surely proides no guarantees that they’ll keep buying T bills even after they cycle this stuff back on to our balance sheet. If banks still fail over seas, they might still stay home and we’re screwed anyway.

    Is this too ‘tin-foil’ a theory? If he’s threatened a veto over an specific foreign asset provision (per Rep. Brad Sherman on CNBC), then there must be a pretty darn good reason why he would threaten a veto on something they’ve been pushing so hard for.

    That would make it seem we’re teeterng closer to the edge than we originally thought.

  34. SBW says:

    Paulson has had two f*cking weeks to come up with a better plan.

    ‘Something is better than nothing’ is pure unadulterated idiocy when handing out a minimum of $700 billion of taxpayer money — to buy up trash. Make a profit? Sure, whatever you say.

    We are already in a recession where I live. And unemployment was rising before the bailout plan was announced.

    And its passing won’t help us a damn bit.

  35. winslow says:

    what was it that I read 10 yrs ago about the Bush ideology…..
    if the government became bankrupt, it would no longer have to fund social programs