A Deficit of Leadership
The greatest onus is on the Bush administration and the Fed. But can we trust those who got it so wrong to put things right?
by Joseph Stiglitz
The financial crisis being felt around the world will get worse - unless strong actions are taken by governments. The strongest action of all is required in the United States, where this global maelstrom originates.
Part of America’s economic problem today is a crisis in confidence - in its central bank, the Federal Reserve, in the regulators, in the Bush administration, in the political process. The way the crisis arose, and the way it has been handled, has provided ample reason for that lack of confidence. Bravado statements that everything is fine, followed by unprecedented and non-transparent bailouts and precipitous decreases in interest rates, has led to confidence in the Fed and the administration plummeting, as has confidence in America’s banks and their ability to manage risk.
The admission by Bush’s treasury that there is a need for regulation may at first seem refreshing, coming after steadfast insistence that these markets are self-regulating and must not be tampered with. But the fact that a core feature of the plan is to give the Fed — the very agency responsible for many of these problems — more oversight is hardly reassuring. It didn’t use what -powers it had to prevent the crisis; what -assurance is there that with more -”oversight” it will do any better?
Underlying the US’s financial woes are three distinct but related problems. First, a debt crisis, exemplified by sub-prime mortgages, with millions of Americans with mortgages greater than the value of their house.
Second, with so many bad debts, and such uncertainty about their magnitude, there is a credit crunch. Banks don’t even know the extent of their own problems; how then can they have much confidence in lending to others? It is not, however, just a problem of -illiquidity; it is deeper than that — -balance sheets have been badly hurt, and will have to somehow be repaired.
The third problem is macro-economic. The US has been sustained by a housing bubble, leading to a consumer binge. Household savings rates have fallen to zero. The Iraq war - and the soaring oil prices accompanying it - has depressed the economy. Money spent on oil or on Nepalese contractors in Iraq is money that isn’t being spent at home; these dollars don’t provide much stimulation for the economy.
more...
http://www.commondreams.org/archive/2008/04/08/8151/
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