- Note: Dr. Joseph Stiglitz is a professor at Columbia
University, former chairman of President Clinton's Council of Economic
Advisors, former chief economist for the World Bank, and a recipient of
the Nobel Memorial Prize in Economic Sciences.
- Dear Dr. Stiglitz:
- I have just finished reading your article published on
Alternet.org entitled, "Is the Entire Bailout Strategy Flawed? Let's
Rethink This Before It's Too Late."http://www.alternet.org/story/124166/
- With all due respect, I believe you have missed the point
of what is going on within the U.S. economy, which causes your
proposed solutions to be similarly flawed.
- The purposes of this letter are to delineate my objections
to what you have written, to bring our differences before the public, and
to challenge you to a debate when I visit New York City on February
27-March 1, 2009.
- You state that, "America's recession is moving into
its second year, with the situation only worsening." But you then
say, "The hope that President Obama will be able to get us out of
the mess is tempered by the reality that throwing hundreds of billions
of dollars at the banks has failed to restore them to health, or even to
resuscitate the flow of lending."
- You thereby imply that the economic crisis is due to
problems within the financial sector and that it would be a good thing
to "resuscitate the flow of lending" without challenging why
that lending became such a huge factor in our economy.
- I say: The problem does not lie with the financial
sector except that the debt-based monetary system acts as a parasite on
the producing economy, resulting in the vast overhang of debt that can
never be repaid. "Resuscitating the flow of lending" will do
no good, because the collapse of consumer purchasing power due to job outsourcing
and income stagnation has made it impossible for people to pay their debts.
Most of this debt now needs to be written off and our producing economy
restored as our chief source of wealth.
- You say of the government's bailout actions late last
year: "Then there was the hope that if the government stood ready
to help the banks with enough money -- and enough was a lot -- confidence
would be restored, and with the restoration of confidence, asset prices
would increase and lending would be restored."
- I say: In making this observation you may
be correct, but you fail to challenge the policy whereby asset price inflation,
in the absence of real economic growth, has become an ersatz economic driver.
Throughout your writings you have ignored the fact that the government
and the banking system have deliberately created financial bubbles to shore
up the economy, engender profits, and maintain tax revenues. This is what
the Federal Reserve under Alan Greenspan did in collusion with the Bush
administration to create a recovery when the Dot.com bubble was collapsing
in 2000-2001. None of your proposals would revitalize the producing economy
or restore consumer income. You seem to be mainly trying to re-inflate
the asset-financial bubble in your own way.
- You say: "The underlying problem is simple: Even
in the heyday of finance, there was a huge gap between private rewards
and social returns. The bank managers have taken home huge paychecks, even
though, over the past five years, the net profits of many of the banks
have (in total) been negative. And the social returns have even been
less -- the financial sector is supposed to allocate capital and manage
risk, and it did neither well. Our economy is paying the price for these
failures -- to the tune of hundreds of billions of dollars."
- I say: It is true that bank manager salaries and
bonuses are obscene, but the way you characterize "social returns"
is shortsighted. You speak of bank profitability falling short even though,
since the financial deregulation of the 1980s and 1990s, the banks have
become the nation's chief growth industry, with profits as late as 2006
of over $500 billion. Further, the financial sector doesn't really "allocate
capital." What it does is skim the cream off the top of the producing
economy by financing consumption and facilitating the most irresponsible
types of speculation in the real estate, equity, hedge fund, and derivative
markets. For example, up to 97 percent of futures contracts comes from
bank loans irrespective of whether such lending has any benefit for consumers
or producers. The banks allocate capital primarily for their own benefit,
which I believe you recognize, but we now need to find alternatives to
a monetary system based on bank-created debt, not just try to get it running
again while ignoring the disasters that have befallen working men and women
and their families.
- You say, in regard to the ongoing government actions:
"But even were we to do all this -- with uncertain risks to our future
national debt -- there is still no assurance of a resumption of lending.
For the reality is we are in a recession, and risks are high in a recession.
Having been burned once, many bankers are staying away from the fire."
- Again, you speak favorably of a "resumption of lending"
as resolving the problem. I say: "What you are proposing is simply
to shore up our debt-based monetary system without addressing the facts
that our manufacturing jobs have been exported to China and other low-cost
labor markets, our automobile industry is collapsing due to the failure
of consumer demand, wages and salaries have stagnated for two decades,
workers have not shared in productivity increases, and the total societal
debt load on a GDP of $14 trillion is now approaching $70 trillion. These
are the problems that must be addressed, not getting the banks to lend
again when people can't pay off the debts they already have.
- You say: "What's the alternative? Sweden (and
several other countries) have shown that there is an alternative -- the
government takes over those banks that cannot assemble enough capital through
private sources to survive without government assistanceInevitably, American
taxpayers are going to pick up much of the tab for the banks' failures.
The question facing us is, to what extent do we participate in the upside
- I say: "Having the government run the banks
instead of the private sector will not restore the economic fundamentals
of a weak economy. Availability of bank credit does not by itself lead
to greater production of goods and services. What it should do is make
the liquidity available for the production-consumption cycle to work smoothly.
The idea that a deregulated financial sector should be given precedence
over all the other economic sectors is the essence of the supply-side,
trickle-down philosophy that began during the Reagan years and has catastrophically
- You say: "Eventually, America's economy will
recover. Eventually, our financial sector will be functioning -- and profitable
-- once again, though hopefully, it will focus its attention more on doing
what it is supposed to do."
- I say: Please tell us exactly HOW America's
economy will recover. Will it recover after real unemployment, including
"discouraged workers" hits 20 percent, which it is likely to
do over the next few months? Will it recover after millions of more people
have their homes foreclosed? Will it recover after the automobile industry
dies? What exactly is your prescription? If you don't have one, I would
ask you to consider what I am proposing in my paper: "A Bailout for
the People: Dividend Economics and the Basic Income Guarantee." In
that paper I put forth what I am calling the "Cook Plan." This
consists of a $1,000 a month payment per capita made by the government
through a system of vouchers for necessities that are then deposited in
a new series of local community savings banks that would lend at one percent
interest for small business, local manufacturing, and family farming. The
vouchers would be a dividend, distributed as each citizens' fair share
of our amazing productive economy without recourse to government taxation
or debt. The dividend would provide income security, eliminate poverty,
and result in a renaissance of local and regional economic activity, and
it would start to act immediately, not "eventually."
- On Friday, February 27, 2009, I will be in your
hometown of New York City presenting the "Cook Plan"
at the 8th Congress of the U.S. Basic Income Guarantee Network and
the Annual Convention of the Eastern Economic Association. That evening
I will present the program at a Town Hall meeting in connection with President
Obama's series of citizens' forums at Nola Studio B, 244 West 54th St.,
11th floor in Manhattan, at 8 p.m.
- On the evening of Saturday, February 28, I am free, and
would be glad to meet you to debate these ideas at a location of your choosing.
- Richard C. Cook
- Richard C. Cook is a former U.S. federal government
analyst. His book on monetary reform, "We Hold These Truths: The Hope
of Monetary Reform," is now available. He was an advisor to Congressman
Dennis Kucinich in his 2004 and 2008 presidential runs. He is also the
author of "Challenger Revealed: An Insider's Account of How the Reagan
Administration Caused the Greatest Tragedy of the Space Age." He can
be contacted through his new website at <http://www.richardccook.com/>www.richardccook.com.