Can the Economy be Saved?

Joseph Stiglitz: "The only solution to our current economic doldrums is large government spending. And if the spending is focused on high-return investments (in education, technology and infrastructure), the nation's debt-to-GDP ratio will actually be lowered. The question isn't whether we can afford to make these investments; we can't afford not to.

Even then, robust recovery won't happen until we write down the debts of the 1 in 4 homes whose mortgages are underwater, in a homeowner's chapter 11 program. We have allowed overburdened corporations a fresh start; why not poor Americans?

Nor will a robust recovery return until we get our dysfunctional financial system doing what it should be doing: providing credit, managing risk, running an efficient electronic payments system. The deservedly hated "bailout" may have kept the financial system from collapsing, but it also extended the government's safety mainly to rich and powerful banks. Smaller banks, focused on actually providing credit to small businesses, the lifeblood of any economy, were allowed to die. The Dodd-Frank regulatory bill was a step in the right direction, but it was a small step, with neither carrots nor sticks to ensure that banks go back to doing "boring" banking. They still are likely to make more money from credit schemes and predatory lending, from writing derivatives and credit default swaps (which may be viewed as gambling or insurance products but aren't regulated as either and are underwritten by taxpayers), and by imposing a tax on every credit and debit card transaction at a rate determined not by competitive forces but the exertion of monopoly power.

When Presidents George W. Bush and Obama went about pouring money into the banking system, they did it without a vision of what kind of financial system would best serve the country in the new century. Little of the stimulus money went to reshape the country, to make it more competitive, more dynamic, more respectful of the environment or less unequal. Had we had that vision, we could have structured what we did in the short run in a way that fostered a more robust recovery -- with more jobs and in a better position for long-term growth with a lower debt. It's still not too late, but we have wasted both valuable time and money."

 Link:  http://www.latimes.com/news/opinion/la-oe-economists-20101114-web,0,1269444.story