What caused the GFC - essential listening

From Radio National's Background Briefing, comes economist and Nobel Laureate, Joseph Stiglitz, on the policies that led to the global financial crisis, and what's needed for a return to economic stability and prosperity.

Currently a Professor of Economics at Columbia University, Stiglitz is a former Chief Economist and Senior Vice President of the World Bank, Chair of the UN Commission of Experts on reform of the international financial and monetary system, and the author of many books. His lecture, at the University of Queensland, was titled Freefall: Free markets and the sinking of the global economy.

He has some key points on the topic of deficits that reflect on how the GFC was handled in Australia:


I want to spend a moment on this myth of austerity, because it's playing a role in the discussions here in Australia, and it's been playing a very big role both in the United States and in Europe. This is a debate that goes back a long way, back to the Great Depression. Whenever economies go into a recession, deficits rise for the obvious reason, tax revenues go down and spending on things like unemployment has to go up, and revenues down, spending up, the deficits rise. That's true - before the recession you have a surplus, as in the case of Spain. It's true if you have it, even more true if before the crisis you have a deficit as in the United States.

Well the current conservative response is cut the deficit, through austerity, through raising taxes, one way, but usually not the way they talk about, but mainly through cuts in expenditure. The idea is that this austerity will restore confidence and with this restoration of confidence, economic growth will be restored.
In their minds, some notion of a confidence fairy that descends from somewhere, that drops its little drops of confidence dust on businessmen, and all of a sudden, as they see these government deficits down, they rush in and start to invest. Well, I wish it were true. But this is a theory that has been debunked over and over again.

Now in the case of this last crisis, we should be clear, the waste by the private sector, the misallocation of capital, is a waste of resources, the under-utilisation of resources is a waste of resources. That waste of resource, is greater than almost any government outside of war that has ever been engaged in. So we have to have some prospective. Yes, there was a little waste in the public sector, but the waste in the private sector is an order of magnitude larger, and it's hard to really keep this in mind, but that's true.


And the second thing to keep in mind is that if you hadn't spent money to stimulate the economy, even if some of that money was wasted, if you hadn't spent money, you would have another kind of waste, because you would have under-utilised your human and capital resources. That's a waste. So your choice wasn't between one perfect policy and another perfect policy, it was between two imperfect policies. And in that choice, the right one was made.