In an April 25 interview with CNBC, Nobel Prize Laureate Professor Joseph Stiglitz of Columbia University provided a bleak long-term outlook for the U.S. economy. “This is going to be one of the worst economic downturns since the Great Depression,” Stiglitz advised. Stiglitz’s analysis is directly contrary to recent claims of Wall Street executives who contend that the worst is behind us. Of course, many Wall Street executives made similar claims last October when the firms recognized billions of dollars in losses.
According to Stiglitz, the primary cause of the recession is historically unique and thus perplexing those responsible for finding solutions. Previous recessions were caused either by excessive inventories or inflation. This downturn is caused by “badly impaired” banks and financial entities that will or cannot lend capital. Even borrowers who usually drive the country back to vitality remain uncertain as to what to do.
Although inflation was not the primary cause for the recession, it remains a menace according to Stiglitz. Stiglitz addressed the danger of high oil prices coupled with rising food prices that harm businesses and scare consumers. “Oil is particularly bad,” because it means that more dollars “will be going abroad,” Stiglitz said.
The housing downturn is feeding into a prolonged recession. During the real estate bubble, Americans were able to withdraw billions of dollars by way of home equity loans. That money, however, was usually consumed rather than invested. Falling home values have dried up a viable spending source and left homeowners with little or no equity to tap.
“The Bush Administration’s [economic stimulus package] is too little, too late and very badly designed,” Stiglitz stated. Compared to the money being held back as well as siphoned out, the tax rebate checks will only be a “drop in the bucket.”
“If you really wanted to stimulate the economy, increase unemployment insurance,” Stiglitz suggests. “The President is telling people to go out and get jobs ? and there are no jobs for them.”