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Nobel Laureate Joseph Stiglitz: Foreclosure Moratorium, Government Stimulus Needed to Revive US Economy

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As the Obama administration rejects a foreclosure moratorium and austerity protests grip Europe, we assess the state of the US and global economy with Nobel Prize-winning economist Joseph Stiglitz, author of Freefall: America, Free Markets, and the Sinking of the World Economy. Stiglitz backs calls for a foreclosure moratorium and says opponents of a new government stimulus “don’t understand basic economics.” On war, Stiglitz says Iraq and Afghanistan are “the first wars in America’s history financed totally on the credit card.” [includes rush transcript]

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This is a rush transcript. Copy may not be in its final form.

AMY GOODMAN: Federal law enforcement officials are launching an investigation into possible criminal violations of US law by banks and other financial firms involved in the foreclosure crisis. The multi-agency task force on financial fraud, led by investigators in the Justice, Treasury and Housing departments, are exploring whether banks broke the law and misled federal agencies when using fraudulent documents to foreclose people’s homes.

The federal probe coincides with an effort by investors to hold firms accountable for selling securities composed of improperly serviced mortgages. Late Tuesday, a consortium of eight investors, including the Federal Reserve Bank of New York, demanded that Bank of America buy back some $47 billion worth of troubled home loans packaged into bonds by Countrywide Financial, which is owned by Bank of America. The New York Fed is also considering suing Bank of America.

The inter-agency federal investigation was announced a day after Bank of America and GMAC Mortgage said they’re resuming foreclosures in the twenty-three states where a court’s approval is needed to foreclose. Ten days ago, Bank of America had imposed a nationwide halt on foreclosures following revelations employees at several lenders had approved thousands of foreclosure affidavits and other documents without proper vetting.

On Tuesday, White House Press Secretary Robert Gibbs said the Obama administration is committed to holding banks accountable for any legal violations tied to foreclosures.

PRESS SECRETARY ROBERT GIBBS: Our concern has been ensuring that the process adequately complies with the law. That’s what led — like I said, that’s what led FHA to get involved in this. That’s what’s led the Financial Fraud Enforcement Task Force to be involved in this process, as well as our support for fifty state attorneys general ensuring, again, compliance with the law. Obviously, they have certain requirements in the law that have to be met, and if they’re not meeting those requirements, they certainly can face fines from us and they can face legal action from homeowners.

AMY GOODMAN: Well, members of President Obama’s Financial Fraud Enforcement Task Force and other administration officials are scheduled to meet today to discuss the foreclosure crisis.

For more on the state of the economy in this country and around the world, I’m joined here in New York by the Nobel Prize-winning economist Joseph Stiglitz. He’s a professor at Columbia University and the author, most recently, of Freefall: America, Free Markets, and the Sinking of the World Economy. It’s just out in paperback.

Welcome to Democracy Now!

JOSEPH STIGLITZ: Nice to be here.

AMY GOODMAN: OK, let’s start with foreclosures. What do you think needs to be done? If you were in that room today in Washington, DC, what would you say?

JOSEPH STIGLITZ: Well, first, I’d begin with the problem of so many Americans owing more on their homes than the value of their homes. We have to put this in context. The mortgage companies, the banks, engaged in predatory lending practices. They weren’t asking what was the best mortgage for these homeowners; they were asking what was the mortgage that generated most fees for me. The way the mortgage system worked, they could take bad mortgages, sell them off to investment banks that would repackage them and sell them on to other people. That’s the other part of the story that you were talking about, where PIMCO, Federal Reserve, all these people who have wound up with these securities, say, “You gave us a lot of junk.” So, it’s all the way along the pipeline that there has been fraudulent behavior, all the way from the foreclosures that you were talking about, but really going back to the creation. So, in my mind, what we should begin is trying to protect Americans.

So, we ought to have a homeowners’ Chapter 11. Let me explain what that idea is. You know, when corporations have trouble paying what they have to pay, what we say is we can write down the debt. It’s so important to keep those enterprises going, keep the jobs, keep the suppliers going, that we allow them to write down the debt and restructure. Well, keeping American families going is even more important, I think, than keeping corporations going. So, that should be part of the philosophy, that we ought to say, look at, the banks were really derelict in the loans that they made. They should have known that there was a bubble going on. I certainly talked about it; other people talked about it. They were really engaged in predation. So let’s use a homeowners’ Chapter 11 that allows a speedy write-down of what is owed, converting some of the debt into equity, so that when they sell the loans sometime — when they repay — sell their house sometime in the future, if the market recovers, some of the capital gain will go to the bank. But meanwhile, the payments that the homeowners will have to make will go way down. And that will mean that they can stay in their home. And that will be good for the families. It’ll be good for the communities. When people are thrown out of their homes, it’s bad for the family, it’s bad for the community. And we have this, you know, real evidence that our market system isn’t working when we have empty homes and homeless people. That’s not the way a market economy is supposed to operate.

AMY GOODMAN: Would you support a foreclosure moratorium?

JOSEPH STIGLITZ: Well, I think probably the answer is yes. The fact is that they’ve generated so many bad mortgages, so many fraudulent mortgages. And by the way, this problem of fraud has been known for a long time. The FBI started reporting on this years ago. I talk about that problem in my book. It’s not just risky lending. It was fraudulent, predatory, all these — and so, we have a backlog now. And we shouldn’t be surprised that our legal system is not capable of processing the numbers of foreclosures that have to be processed. We’re talking about probably something in the order of magnitude of three million, three-and-a-half million foreclosures actions this year. Last year, the estimate was about two million lost their home; the year before, two million. Our system isn’t geared to do that.

But there’s a more — there’s a deeper point that I’d like to raise, which is the following. You know, in a democracy like ours, people have to have confidence in the fairness of our legal system. And if they feel that the legal system is stacked against them, then voluntary compliance — our whole social fabric starts fraying. And I think a lot of Americans have come to the view that the system is stacked against them. It began, in a way, with the bankruptcy law that was passed back in 2005 that, in effect, reintroduced bondage in America. I mean, people haven’t realized how bad that law was. If you owe a hundred percent — you know, amount of money that’s equal to a hundred percent of your income — you have a $40,000 income, you wound up with a credit card debt and other debt of $40,000 — for the rest of your life you may be working 25 percent of your time for the banks. The way it works is very simple. They can take 25 percent of your income — you know, it used to be easy that you could go bankruptcy and you get discharged of the debt. They made it very difficult. So, you can pay 25 percent of your income every year to the bank, but then the bank can charge you 30 percent interest. So, the end of the year, you owe more money than you did at the beginning of the year, even though you gave 25 percent of your income to the bank. Now, this is an example of something that is clearly socially unjust.

AMY GOODMAN: This was passed when the Republicans were in control.

JOSEPH STIGLITZ: That’s right.

AMY GOODMAN: And this was 2005.

JOSEPH STIGLITZ: That’s right.

AMY GOODMAN: Now, we’re talking about foreclosures by banks, and which President Obama is not for a nationwide foreclosure moratorium. But even the government, it is the largest foreclosure entity out there, according to Bruce Marks of NACA, a housing activist. FHA mortgages, government-owned, are doing massive numbers of foreclosures; Fannie Mae, massive numbers of foreclosures, he said. So he said President Obama maybe doesn’t want to do a full moratorium. But why not make the government-owned entities, the ones that the taxpayers own and control, let’s start with them?

JOSEPH STIGLITZ: It actually makes sense for our economy. And let me explain why that is, because when you dump all these mortgages, these houses, onto the market, it depresses the prices, and that means that the real estate market is destabilized. One of the advantages that the government has is that it can and should take a longer-term horizon. It should realize that if it holds onto these a little longer, provided it can maintain those homes, then it’s a lot better as an owner of the home. They don’t have to be shortsighted in the way the banks are so shortsighted. So, in a sense, it’s even good economics for the taxpayer. And again, it goes back to the point I made before. It makes absolutely no sense in our economy to be creating homeless people, throwing people out of their homes, disrupting the education of their children, undermining the communities, and at the same time, having these empty homes. What really happens, when you throw people out, very quickly the house debts starts to get wasted.

AMY GOODMAN: And this, of course, affects these midterm elections. If President Obama cares about Democrats controlling the House and the Senate, this is the major issue, is the economy, jobs, foreclosures. And yet, they constantly — just in the last few days, David Axelrod, the White House adviser, speaking for the President, says there are in fact valid foreclosures that probably should go forward. HUD, they’re saying the same thing. Where do people gain any confidence that the President, who said he was taking on the big corporations, cares more about them than the banks?

JOSEPH STIGLITZ: Well, you know, one of the key words here that you said is “valid” foreclosures, because we believe we have a system with a rule of law, but what we have to recognize is that there was fraud all along the line. They were creating these mortgages at such a rate that the documentation wasn’t done well. — they were creating these mortgages as such a rate that the documentation was not done well, that we know there are lots of instances where — when the people went into the final signing of the mortgages, the income that was stated was not the income that the person told them. And then they would say something, “Oh, don’t worry, that’s a technical detail.” So, is that a valid mortgage or not? The fact was, it looked like the documentation was right, but in the creation of the documentation, there was fraud. Now, we were manufacturing — or the financial sector was manufacturing bad mortgages at such a rate that, literally, it’s extraordinarily difficult to tell, at this juncture, what is a good mortgage and what was not. When there was misrepresentation to the borrower, is that valid or not? And so, I think we have to recognize that this process, from 2003, '04 on, was just rife with these problems. And it allowed the banks to book high profits then, and now the key issue is they don't want to admit the losses that are associated. And that’s really what the battle is about.

AMY GOODMAN: We’re talking to Joseph Stiglitz, Nobel Prize-winning economist, professor at Columbia University. His book is just out in paperback; it’s called Freefall: America, Free Markets, and the Sinking of the World Economy. If you want to join in the discussion, you can send in your questions at Facebook, We’ll be back in a minute.


AMY GOODMAN: Our guest is Joseph Stiglitz, Nobel Prize-winning economist, professor at Columbia University. His book is out in paperback, Freefall: America, Free Markets, and the Sinking of the World Economy.

So, just to summarize, you are for a national moratorium on foreclosures.

JOSEPH STIGLITZ: I think — inevitably, I think we have to be moving towards that. And the reason is very simple. There were such — the bad practices were so rife, the inequities were so rife, the fraudulent behavior was so common, that at this point we don’t know what is a valid mortgage and not. And the consequences of throwing somebody out of their home, when they shouldn’t be, are hard to reverse. I mean, just imagine what it does to the family —- education of the kids are interrupted -— what it does to the community. So, when we have to balance the injustices — and life is unfortunately always balancing one side versus the other — and where will their mistakes be easily reversed and where not? My view is, if we keep them in the homes for a little longer, they owe the money — they still owe the money, that doesn’t let them off the hook — but what we’re saying is we’re not going to speed up this process of — where there’s the serious risk of an inequity that will not be easily compensated for.

AMY GOODMAN: Joe Stiglitz, the deficit, the battle cry of the Tea Party movement, of the Republicans, as well. Robert Rubin has weighed in, says any new stimulus plan is highly likely to be counterproductive. What do you think has to happen? Does the deficit matter? And how do you think it should be dealt with?

JOSEPH STIGLITZ: My view is we cannot afford not to stimulate the economy. So, you know, anybody that says we should go back to austerity or we should not have a second-round stimulus just doesn’t understand economics. And let me be very clear about this. If we don’t stimulate the economy, the economy is going to get weaker. When the economy gets weaker, tax revenues go down and expenditures go up. Already, more than 40 million Americans are on food stamps. Number of people on Medicaid is reaching record levels. So, revenues go down, expenditures go up, deficits get worse. If you stimulate the economy, then people get jobs, they spend money, tax revenues go up. Now, if we spend the money on investments — investments in education, technology, infrastructure — you grow the economy in the short run from the stimulus, you grow the economy in the long term because of the returns that you get on these investments.

I mean, just think about this from the point of view of a firm. If you are a firm and you could borrow at zero to two-and-a-half percent, which is what the government can borrow, and you have investment opportunities that you owe ten, 15, 20 percent, you would be irresponsible, you would be foolish, not to undertake those investments. So, anybody that says, “I’m going to only look at one side of the balance sheet, the liabilities; I’m not going to look at the other side, the assets,” is really not understanding economics. It’s that kind of reasoning that got our country in the trouble in the first place, the people who didn’t — you know, shortsighted behavior of the banks that got our country in trouble in the first place. And to me, I just view those kinds of statements as totally irresponsible.

AMY GOODMAN: Let me ask you how war fits into this. I mean, you co-wrote the book with Linda Bilmes, The Three Trillion Dollar War. How does war fit into our problems with the economy?

JOSEPH STIGLITZ: Well, war fits in because you’re creating a liability, you’re spending money. And when we went to war in Iraq and Afghanistan, we already had a deficit. And so, these wars were the first wars in America’s history financed totally on the credit card. So, you’re creating a liability, but you’re not creating an asset. So that’s the kind of spending that does weaken the economy, because it’s one-sided. Now, we came out just a couple weeks with new numbers that unfortunately show that our old numbers were a little wrong, in the sense that they were too conservative.

AMY GOODMAN: Three trillion dollars.

JOSEPH STIGLITZ: Was too little. And particularly what we looked at in a report — we testified before Congress — what we looked at was the large number of troops returning who are disabled. Turned out that the numbers returning disabled are higher than we had estimated. It’s close to 50 percent now. And the cost per disabled, injured troop is higher. So we had talked then about the cost of healthcare and disability payments for our returning troops in the order of maybe a little less than a half-a-trillion dollars. That’s a lot of money. Our new numbers are, best estimate, in excess of $900 billion. These are unfunded liabilities, a moral obligation — they fought for us — unfunded, totally unfunded. The good news is that they were trying to put together a coalition of people who believe in responsible budgeting, that said, “OK, if we’re going to send our troops overseas, we ought to at least put aside the money to pay for the full in costs. The full in costs include the costs of these disabled people.

AMY GOODMAN: So what you’re estimating the cost of both the wars in Iraq and Afghanistan now at?

JOSEPH STIGLITZ: Well, well in excess of the $3 trillion. Before, the numbers that we said were actually three to five trillion. That doesn’t sound as catchy a title as —- “The Three to Five Trillion Dollar War.” The numbers now are much more like four to six trillion. And -—

AMY GOODMAN: And yet, across this country, as the debates over — you know, for various congressional and Senate seats, for any seat, whether you’re talking about a state one, as well, war is almost never raised.

JOSEPH STIGLITZ: Yeah, I don’t understand that, because what should be so clear is that we have a limited amount of resources. And the critics who say we have to worry about the debt are right in emphasizing the economics of scarcity, that we have a limited amount of resources. But the issue isn’t whether to cut back; the issue is how we spend our money, because cutting back would weaken the economy, but reallocating our money, more money for those who are unemployed — remember, we have one of the worst systems of social protection, unemployment insurance, of the advanced industrial countries. We are a whole group of people called the ninety-niners, who have come to the end of their unemployment benefits and are being, you know, left to fend for themselves. So, what we really need to do is to rethink how we spend the money, make sure that we spend the money in a way that will energize our economy. Spending money in Afghanistan, paying money for contractors, are not the way to energize our economy and make our economy strong, competitive for the long run.

AMY GOODMAN: How much do you think a stimulus should be in this country?

JOSEPH STIGLITZ: Well, I think we really need $400, $500 billion a year. Part of the reason why we should try to keep those kinds of numbers in mind is to realize that we have a federal system, about a third of all spending is at the state and local level, and the states have balanced budget frameworks, which mean when the revenues go down, they have to cut back spending or raise taxes, which is very difficult in the current environment. And their revenues are going down. They depend very heavily on property taxes. Values of real estate have gone down 30, 40 percent, in some places 50 percent. And the result of this is that we’re laying off teachers. We’re laying off basic — those who provide basic services. So, while the government is coming to the end — the federal government is coming to the end of the stimulus, the states are retracting. We saw that in the September numbers on jobs. Sixty-seven thousand private-sector jobs were created — not enough for the new entrants in the labor force, less than half the amount we needed. But we lost, in total, 95,000 jobs. In other words, there was about a 140,000 loss in the public sector, predictable — I talk about that in my book — predictable, unless we find some ways of making up for their shortfall.

AMY GOODMAN: And you say the stimulus would do that?

JOSEPH STIGLITZ: If we have another stimulus, it could do that.

AMY GOODMAN: So why don’t you think President — since that even in his own interest — I mean, when you see the Democrats caving, falling all over the country, what looks like the predictions for this election.

JOSEPH STIGLITZ: You know, I said that that’s what we should have done in the first round of stimulus, because it was so clear where we were going.

AMY GOODMAN: So, who’s not listening to you? President Obama? Timothy Geithner? Larry Summers, now gone?

JOSEPH STIGLITZ: I think —- you know, let me be frank. I think what happened is that some of these people who helped create the crisis, who, you know, were in favor of the deregulation, who didn’t do their job regulating the banks that they should have done -—

AMY GOODMAN: Naming names here?

JOSEPH STIGLITZ: Well, you can figure out who those are.

AMY GOODMAN: No, no, you tell us.

JOSEPH STIGLITZ: Well, well, Geithner was the head of the New York Federal Reserve Board, whose responsibility is overseeing New York banks.

AMY GOODMAN: Now the Treasury secretary, Timothy Geithner.

JOSEPH STIGLITZ: And we know Larry Summers was — you know, his great achievement was passing the law that deregulated — made sure that derivatives, these risky securities that led to the downfall of AIG, costing $180 billion — his great achievement was to make sure that this was not regulated, not regulated as a gambling product, not regulated as an insurance product, not regulated as securities.

Well, having created these problems, they had an incentive, quite frankly, to try to say this is — you know, “The problems are not that deep. All we have to do is fix the banking system. You know, there’s been an accident. Who could have predicted this?” And the answer is, a lot of us did. But it was something that happened to the banking system, rather than something the banking system did to us. So their incentive — this is a problem of accountability — their incentive was to try to say, “OK, we’ve had an accident. We put the banks into the hospital. We give them a little money. Let’s not try to interfere how they spend the money, because that’s not the way we do things,” so that they could take that money, rather than recapitalize, give it out in bonuses or dividends. But we just put it in the hospital for a couple years, and meanwhile, we have this moderate-size stimulus. But then, year-and-a-half later, two years later, the banks have recovered, and we go back to where we were before 2007.

Well, reality is that the economy was sick before that, and you can’t go back to 2007. And now we are at the end of the two years. It’s so clear that the economy is not back to health and that 200 — that two-year stimulus was too small, not well enough designed, and we’re left in the situation that we have today, where the economy clearly is — continues to be sick, not in the sense that the banks are making profits again — Wall Street is not doing badly — but sick in the real sense: one out of six Americans who would like a full-time job cannot get one. That is a sick economy, in my mind.

AMY GOODMAN: Nobel Prize-winning economist Joseph Stiglitz, his book Freefall is just out in paperback, subtitled America, Free Markets, and the Sinking of the World Economy. So let’s go to the world economy. There have been a wave of protests across Europe against the so-called austerity measures and budget cuts in several European countries. In France, workers are striking for the seventh straight day over pension reform. In Britain, the government is preparing to reveal the biggest program of budget cuts in decades. Unions held a rally in London Tuesday to protest the cuts.

BRENDAN BARBER: These cuts will lose over a million jobs. And let’s be clear, this is not an economic necessity, but a political choice that they’re making.

TONY WOODLEY: It’s absolutely crucial at the moment that we don’t allow our public sector to be assassinated and decimated, not just because public services will be affected, but because the whole of our country’s economy will be — may be leading for a double-dip recession. We may not recover for many years to come.

AMY GOODMAN: That’s Britain. Your response, Joe Stiglitz?

JOSEPH STIGLITZ: I’m terribly worried, not just for Britain, but for the world economy. You know, there was a moment after Lehman Brothers fell, the world came together. We were all Keynesians. That is to say, we all knew that what the economy needed was each country had to stimulate their economy. That moment of global consensus is gone. And what is going on now is, in a very large number of countries, that we’re going back to what I call Hooverite policies. I mean, we’ve tried this experiment, where you have conservatives say, “OK, the deficit has gone up, and if we’re going to restore confidence, we have to bring down the deficit by cutting back spending.” This is an experiment we’ve tried over and over again. After the stock market crashed, Hoover succeeded in bringing us into the Great Depression by exactly that kind of reasoning.

What happens is interesting: it’s self-defeating. Because the economy gets weaker, the deficit — tax revenues go down, the deficit doesn’t get that much better. But meanwhile, because the spending goes down, the economy — jobs get destroyed, economy gets weaker and weaker, confidence gets destroyed, not restored. Because we live in a globally integrated economy, what happens in Europe will affect us. President Obama, many other leaders who had hoped that one of the ways that the US economy would be restored would be through exports, but if Europe is weak, we’re not going to be able to export.

AMY GOODMAN: This is a question we just got submitted to our Facebook page from Stevia Hawkins in Atlanta, Georgia: “Some people on the right are labeling the French uprising as the 'dangers of socialism.' What would you say to them?”

JOSEPH STIGLITZ: No, what they’re asking is, “We need social protection.” You know, workers individually can’t control the economic environment. You know, in the old economy, agriculture economy, you could work your field, you were still buffeted by vagaries in weather, international prices, but you could always get a job, because you could work your own field. But in a modern economy, if firms are firing, you have no choice. You know, there are very limited opportunities that the individual has. So it is the responsibility of state, of the government, to maintain the economy at full employment. And we recognized that in the Full Employment Act of 1946. Unfortunately, we are not living up to the commitment we made in 1946 to maintain the economy at full employment. We have, as I said, one out of six workers who are unemployed. Increasingly, a large number are unemployed now for over six months.

AMY GOODMAN: Joe Stiglitz, we just have time for one question, last question, which is about China raising its interest rates for the first time in nearly three years, coming a day after the Treasury secretary vowed not to devalue the dollar to boost the economy. Explain the significance of this.

JOSEPH STIGLITZ: Well, the one source of strength in the global economy has been the emerging markets. And they’ve been doing very, very well. The problem is that the Federal Reserve has been letting forth a lot of liquidity in the hope that it would reignite the American economy. But the administration and Federal Reserve did not fix the banking system, did not deal with the mortgage problem, that we were talking about before. So the money isn’t going into the American economy. The lending is actually below what it was in 2007. In a globalized economy, the money is looking for the best place to go. And where is it finding it? In the emerging markets.

So, the irony is that money that was intended to rekindle the American economy is causing havoc all over the world. Those elsewhere in the world say, what the United States is trying to do is the twenty-first century version of “beggar thy neighbor” policies that were part of the Great Depression: you strengthen yourself by hurting the others. You can’t do protectionism in the old version of raising tariffs, but what you can do is lower your exchange rate, and that’s what low interest rates are trying to do, weaken the dollar. The flood of liquidity abroad is trying to push the exchange rates abroad. And they say — they’re saying, “We can’t allow that.”

AMY GOODMAN: And thirty seconds. China, in particular?

JOSEPH STIGLITZ: Well, in the case of China, in particular, if it slows down significantly, it’s going to be bad for the US economy, not just directly, but China has been the support for Latin America, Africa. China has become the real engine of global economic growth. If it slows, Africa, Latin America slows, and that means American markets all over the world are going to have difficulties.

AMY GOODMAN: We’re going to leave it there. Joseph Stiglitz, winner of the Nobel Prize in Economics, his book Freefall is just out in paperback, America, Free Markets, and the Sinking of the World Economy.

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