Yesterday, our very own Professor Joseph Stiglitz, Nobel laureate for economics, stopped by Zuccotti Park to talk to the protestors, along with fellow economist Jeff Madrick. Because the demonstrators are not allowed to amplify sound in any way, the speeches are repeated a sentence at a time by the crowd so that the words can reach those who are not in earshot. Stiglitz’s opened his speech with a quip about the so-called echo chamber: “I realize the pedagogy of having to repeat what I say is very valuable, but it makes the whole process much longer.” Spoken like a true economist!
“There’s a system where we socialize losses and privatize gains,” he continued. “That’s not capitalism, that’s not a market economy, that’s a distorted economy and if we continue with that we won’t succeed in growing, and we won’t succeed in creating a just society.” This obviously went down well with the crowd, and Prof Stiglitz appeared to be very chuffed. Watch the full speech, or read our transcript below:
Before talking about economics, I want to say something about democracy. In July, I was in Spain, talking to the “indignados” there, the protesters. There, I could use a bullhorn. I didn’t have to go through this echo chamber. I realize the pedagogy of having you repeat what I say is very valuable, but it makes the whole process much longer. The fact that you are not allowed to use a megaphone on a Sunday is outrageous! We have too many regulations stopping democracy and not enough regulations stopping Wall Street from misbehaving. You should have the right peacefully and demonstrate your views and not be arrested and not be sprayed with pepper spray.
So now I want to talk a little bit about what I said in Spain, and then about the banks. The protests there are called the “indignados,” and I said, “You are right to be indignant.” The fact is, the system is not working right. It is not right that we have so many people without jobs when we have so many needs that we have to fulfill. It’s not right that we are throwing people out of their houses when we have so many homeless people.
Our financial markets have an important role to play. They’re supposed to allocate capital and manage risk, but they’ve misallocated capital and created risk. We are bearing the cost of their misdeeds. There’s a system where we’ve socialized losses and privatized gains. That’s not capitalism! That’s not a market economy. That’s a distorted economy, and if we continue with that, we won’t succeed in growing, and we won’t succeed in creating a just society.
To make it a little more clear how Wall Street was allowed to take all that risk, the bankers were able to take home their bonuses every year by developing risky strategies that one day had to go bad. They knew, however, they would take out their money before most of those investments went bad. Economists call this “asymmetric incentives.” You make money by taking risk, but nobody takes it away from you when the strategies don’t work and lose lots of money. That was one of the core problems with Wall Street. Could Washington have done something about that? Yes! There were other problems. I’ve got to throw it to Joe to talk about other problems.
One of the things the banks did was to prey on the poorest Americans [through predatory lending. We knew about it. There were some people who tried to stop it, but they used their political power, [that is] Wall Street used its political power, to stop those who would stop them.
Just to keep going on this, the FBI actually told the powers that be that there was an epidemic of fraud in 2004 in the mortgage market. Washington and the Federal Reserve had the power to do something about that. They did not. The more bad mortgages went on, the predatory lending got worse, and the powers that be—in particular and let me name names, Alan Greenspan, the Chairman of the Federal Reserve—was able to retire in glory. Is there something with this picture? There sure is, and there are a lot of other areas we can discuss.
Two more things. After the bubble broke, they continued in their way of disobeying the law, in a sense—throwing people out of their houses, even in some cases when they didn’t owe money. The balance of rights has been distorted. We bailed out the banks with an understanding that there would be a restoration of lending. All there was was a restoration of bonuses! Unless we deal with the anti-competitive practices, with the reckless lending and speculative behavior, with the anti-competitive practices, unless we restore finance to the function it should serve, we won’t have a robust recovery.
One last point. There had been few civil suits by the federal government. Even when they make them, they settle. There may be some hope somebody’s lighting a fire under prosecutors and attorneys general. Not all on Wall Street broke the law, but it is hard to believe that some didn’t, and it’s important so that all of us can understand that not all that happened was simply well-meaning gigantic errors. By prosecuting where there was serious unethical practices, we may provide another deterrent. Unethical practices were a major contributor, in my view, to the crisis we had and the difficult future we face.