Fat cats of finance should bear most of the pain

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This was published 13 years ago

Fat cats of finance should bear most of the pain

By Joseph Stiglitz

For Europe and the US, 2010 was a year of disappointment. It has been three years since the bubble burst, and more than two since Lehman Brothers collapsed.

In 2009 we were pulled back from the brink of depression, and 2010 was supposed to be the year of transition: as the economy got back on its feet, stimulus spending could smoothly be brought down. Growth, it was thought, might slow slightly this year, but it would be a minor bump on the way to robust recovery. We could then look back at the ''great recession'' as a bad dream; the market economy - supported by prudent government action - would have shown its resilience.

In fact last year was a nightmare. The crises in Ireland and Greece called into question the euro's viability and raised the prospect of a debt default. On both sides of the Atlantic unemployment remained high, at about 10 per cent.

Unfortunately, the new year's resolutions made in Europe and the US were the wrong ones. The response to the private sector failures and profligacy that had caused the crisis was to demand public sector austerity. The consequence will almost surely be a slower recovery and an even longer delay before unemployment falls. It has become politically fashionable to preach the virtues of pain, no doubt because those bearing the brunt of it are those with little voice, the poor and future generations.

To get the economy going, some people will, in fact, have to bear some pain, but the increasingly skewed income distribution gives clear guidance to who this should be: about a quarter of all income in the US now goes to the top 1 per cent, while the income of most Americans is lower today than it was a dozen years ago. Simply put, most Americans did not share in what many called the ''great moderation'', but was really the mother of all bubbles. So, should innocent victims and those who gained nothing from fake prosperity really be made to pay even more?

Europe and the US have the same talented people, the same resources and the same capital that they had before the recession. They may have overvalued some of these assets; but the assets are, by and large, still there.

Private financial markets misallocated capital on a huge scale in the years before the crisis, and the waste resulting from underutilisation of resources has been even greater since. The question is, how do we get these resources back to work? Debt restructuring - writing down the debts of home owners and, in some cases, governments - will be key. It will eventually happen. But delay is very costly, and largely unnecessary.

The financial sector will press governments to ensure full repayment, even when it leads to massive social waste, huge unemployment and high social distress, and even when it is a consequence of their own mistakes in lending.

But there is life after debt restructuring. So this is my hope for this year: we stop paying attention to the so-called financial wizards who got us into this mess - and who are now calling for austerity and delayed restructuring - and start using a little commonsense.

If there is pain to be borne, the brunt of it should be felt by those responsible for the crisis, and those who benefited most from the bubble that preceded it.

Guardian News & Media

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