Joseph Stiglitz, the great socialist economist, is out with an editorial about QE3 – and he has decided that something other than an “easing” is called for. Stiglitz’s astonishing suggestion is that what the US in particular needs now is “an expansionary fiscal policy and financial-sector reforms that boost lending.”
Stiglitz seems to be suggesting tax cuts! What an amazing thing… Most Keynesian collectivists only see one solution – more government “takings,” but here is Stiglitz acknowledging what we’ve written in past articles, that the previous easings have bolstered bank credit and equity inflation without doing much for the larger economy.
This is because the money is trapped in bank coffers and is not circulating.
Stiglitz’s point is that the trillions launched by the Fed have not reached smaller banks where much middle class lending is consummated. He also makes the case that many mortgages STILL remain “under water” – further retarding any potential entrepreneurial itch.
Between monetary misalignment, a punitive tax policy and the paucity of currency available to smaller banks, it is no wonder that Stiglitz comes up with his gloomy prophecy, as follows:
“The current downturn, already a half-decade long, will not end any time soon. That, in a nutshell, is what the Fed and the ECB are saying. The sooner our leaders acknowledge it, the better.”
Stiglitz has three concerns regarding QE3. We’ve mentioned them before, but he presents them clearly, as follows:
The Fed and ECB actions sent three messages that should have given the markets pause. First, they were saying that previous actions have not worked; indeed, the major central banks deserve much of the blame for the crisis. But their ability to undo their mistakes is limited.
Second, the Fed’s announcement that it will keep interest rates at extraordinarily low levels through mid-2015 implied that it does not expect recovery anytime soon. That should be a warning for Europe, whose economy is now far weaker than America’s.
Finally, the Fed and the ECB were saying that markets will not quickly restore full employment on their own. A stimulus is needed. That should serve as a rejoinder to those in Europe and America who are calling for just the opposite—further austerity.
Facing up to the failure of quantitative easing, Stiglitz makes the astonishing assertion that “The stimulus that is needed—on both sides of the Atlantic—is a fiscal stimulus.”
Fiscal means “tax” in Stiglitz’s circles. He even attacks the “austerity” being implemented in Europe – and presumably in the US – as a barrier to recovery. Presumably he’s speaking of the tax hikes that the IMF is demanding in Spain, Greece, etc.
Stiglitz is a bit foggier on “financial sector reform.” He seems to want the ECB to open the taps fully in Europe, writing that, “Fear of losing economic sovereignty will make governments reluctant to ask for ECB help, and only if they ask will there be any real effect.”
He is also worried about monetary arbitrage, writing that, “There is a further risk for Europe: If the ECB focuses too much on inflation, while the Fed tries to stimulate the U.S. economy, interest-rate differentials will lead to a stronger euro (at least relative to what it otherwise would be), undermining Europe’s competitiveness and growth prospects.”
The Fed in other words will be printing money and devaluing the dollar relative to the euro – which will make it harder to sell EU goods abroad because they will rise in price relative to US goods.
We’ll grade Stiglitz one for two from a free-market perspective here. He seems to want a less authoritarian “fiscal” policy. But Stiglitz, like almost every mainstream economist from the left (or right), cannot resist the lure of central banking manipulations. While Stiglitz might acknowledge that central banking policies led to the current crisis, he is sure that HIS solutions would provide a panacea.
He concludes: “For both Europe and America, the danger now is that politicians and markets believe that monetary policy can revive the economy.”
OK, Mr. Stiglitz. Please apply the same sort of analysis to economists such as yourself! ….