Joe Stiglitz: Paulson is Wrong - Regulation Failed and Here's Why

This interview with Joe Stiglitz orginally aired on March 31, 2008 after Hank Paulson floated his proposal for sweeping reforms of our regualatory environment with the Fed taking a key role.

What brought this to mind is the spin that we saw in the financial media today based on remarks made by Paul Volcker. The financial powers are promoting the Fed as the regulator of choice, largely we think as a reaction to some proposals the Democrats are working on in Congress to reform our regulatory environment.

The Fed is a private bank. It must remain 'independent' of the administration and the Federal government to some degree. It maintains an opaque privacy to a fault, not subject to audits or closer scrutiny by Congress and the OMB.

Self-regulation is the last resort of miscreants caught in the act.

DOBBS: The Bush administration today, as we have reported, called for what some say is the most sweeping overhaul of Wall Street regulations since the stock market crash of 1929. And Treasury Secretary Henry Paulson today said this new proposal isn't a response to the circumstances of the day. It's much more high blown than that.

Joseph Stiglitz is Nobel Prize winning economist, former chief economist at the World Bank, also, the coauthor of the new book, "Three Trillion Dollar War: The True Cost of the Iraq Conflict," and also professor of economics at Columbia University just to keep busy.

Good to have you with us.

JOSEPH STIGLITZ: Makes me work.

DOBBS: Let's start with this proposal. I -- I have to tell you, I'm just shaking my head as I think about Henry Paulson, the treasury secretary, saying it's neither accurate nor fair to suggest that this is a failure of regulation, what's happening with our credit markets.

STIGLITZ: He's wrong. It is a failure of regulation. In fact, one of the ironies of this whole discussion is they want to give more power to the Fed. The Fed, which flooded the market with liquidity, which did not put in regulations until after the crisis, In fact, closing the barn door after the horse is out. And now to reward them for their excellent job, they want to give them more power.

DOBBS: Is -- the arrogance and the incompetence of this administration. I have seen incompetent administrations, of course, before in various quarters, but it's so pervasive in this one.

But when talking about regulation, the idea that first of all this administration after of its nonsense about free markets unfettered and free trade, irrespective of cost, to be coming back to even talking about regulation, there is -- the lack of intellectual honesty here is just, to me, horrific.

STIGLITZ: Well, one aspect that I -- they bailed out Bear Stearns.

DOBBS: Right.

STIGLITZ: So you know, if you believe in free and unfettered markets, why not let it just collapse? Well, good reason. The good reason is that it might have led -- led to the collapse of the whole financial market.

But that's why you have regulation. You just don't build better hospitals. You try to stop the diseases before they lead you to be in the hospital.

DOBBS: There are so many, I guess, pandemics at large right now, whether it is in terms -- in terms of economic policy, foreign policy, domestic policy, as a result of this administration's misguided policies. But nothing more toxic, more corrosive than the war in Iraq where we've lost, as I just reported and as I report each night, more than 4,000 fatalities and almost 30,000 wounded, and more than 13,000 of them seriously.

But the economic costs, as well. It is, again, just simply tremendous, as you document in your new book, "The Three Trillion Dollar War."

STIGLITZ: It's hard to conceive...

DOBBS: Three trillion dollars.

STIGLITZ: It's hard to conceive of what that number means. But just to put a couple of examples, to put it in a frame, you know, a few years ago the administration said we have a fundamental problem with our Social Security system.

DOBBS: Right.

STIGLITZ: They wanted to scare the American people.

DOBBS: Right.

STIGLITZ: Well, in the last five years, we've created an unfunded entitlement...

DOBBS: Right.

STIGLITZ: ... for our veterans, the people who fought for us.

DOBBS: And many of whom -- whom will have to -- will require intensive care for the rest of their lives.

STIGLITZ: Yes. And we're talking about hundreds of billions of dollars.

DOBBS: Right.

STIGLITZ: This is the first war in America's history when, as we went to war we already had a deficit, the administration asked our young people to go fight, but didn't say we ought to have shared sacrifice. Instead, it gave a tax cut for the richest Americans.

DOBBS: Right.

STIGLITZ: And so every dollar of this war has been financed by borrowing; 40 percent of this has been borrowing from abroad. First time since the Revolutionary War.

DOBBS: For the first time since the Revolutionary War, as well, we have a -- we have a national debt of $9 trillion, a trade debt of $6 trillion. And that trade debt is rising faster, including the capital that we have to borrow to sustain ourselves. That -- that debt is rising faster than our national debt.

I mean, is there at any point at which we're going to come to terms with the devastating reality of our economy? Whether it's $53 trillion in unfunded liabilities or that $9 trillion national debt, a $6 trillion trade debt, and a $3 trillion war?

STIGLITZ: No. But the war is in one sense at the core of the problem we're facing today, because it's the one thing that is a single, you know, the single biggest piece.

Over $1 trillion of the amount of the increase in the debt, national debt, in the last five years, going forward, is due to the war alone. By 2017, the war, itself, will be responsible for over $2 trillion of the national debt.

DOBBS: And we don't have an election until November, I might point out. Joseph Stiglitz, it's always good to have you here.

STIGLITZ: Nice to be here.

DOBBS: Thanks.

The book is "The Three Trillion Dollar War."

CNN Transcript of the Lou Dobbs Show with Joseph Stiglitz

Almost Time for the Great Long Bond "Crash of 2008"

We get a chuckle sometimes out of seasonality here in the United States of Amnesia.

Every year around May the long end of the US Treasury yield curve tends to rally, putting the associated bonds into a value funk, with a bottom in July.

And every year the pundits screech about the massacre of the bonds, and urge specs to dump them and seek the safety of stocks, which they are selling as part of the "Sell in May and Go Away" migration.

Wash and rinse. Wax on Wax Off. Wall Street lives on rotation.

At some point in mid-summer the long end is going to be a buy again, but not now. It's peaked and is a sell.

Some think this means a dollar rally. Except that the Dollar does not key to the long end of the curve but rather the short end.

This could be an interesting year. It been fun filled so far.

US Government Economic Statistics Are a 'Con Job'

But they just managing our perception of inflation. Its for our own good. Its the least costly most efficient way of fixing all our problems. We can just pretend they do not exist.

'Through clever and constant application of propaganda, people can be made to see paradise as hell, and also the other way round, to consider the most wretched sort of life as paradise.' Adolph Hitler

CNNMoney.com
Economic 'misery' more widespread
Wednesday May 14, 10:37 am ET
By Chris Isidore, CNNMoney.com senior writer

Americans are feeling a lot more economic pain than the government's official statistics would lead you to believe, according to a growing number of experts. They argue that figures for unemployment and inflation are being understated by the government.

Unemployment and inflation are typically added together to come up with a so-called "Misery Index."

The "Misery Index" was often cited during periods of high unemployment and inflation, such as the mid 1970s and late 1970s to early 1980s.

And some fear the economy may be approaching those levels again.

The official numbers produce a current Misery Index of only 8.9 - inflation of 3.9% plus unemployment of 5%. That's not far from the Misery Index's low of 6.1 seen in 1998.

But using the estimates on CPI and unemployment from economists skeptical of the government numbers, the Misery Index is actually in the teens. Some worry it could even approach the post-World War II record of 20.6 in 1980.

"We're looking at government numbers that are really out of whack," said Kevin Phillips, author of the book "Bad Money."

No inflation if you don't eat or drive

According to the government's most recent Consumer Price Index, a key inflation reading, consumer prices rose 3.9% in the 12 months ending in April, down slightly from the 4% annual inflation rate in March despite record gasoline prices.

But Phillips argues that consumer prices are probably up at least 5% and perhaps more than 10%.

Part of the disconnect may be due to the fact that nondurable goods, such as food and gasoline, makes up only 12% of CPI.

In addition, food and energy prices are eliminated from the so-called core CPI, which many economists tend to focus more closely on because they claim food and gas prices are volatile.

But food and energy costs are a very important part of household budgets. And those prices have been skyrocketing: Gas prices were up about 21% over the 12 months ending in April. However, due to seasonal adjustments in the CPI, the government reported that gas prices were down 2% in April, even though on a non-adjusted basis, gas prices rose 5.6% from March.

And even that number may be too low. Measures of gasoline prices by AAA and the Department of Energy suggested prices rose as much as 10% in April.

Meanwhile, food prices rose 5.1% over the last 12 months, according to the report. The nearly 1% one-month jump in food prices in April was the biggest spike in 18 years.

To that end, nearly half of the respondents of a recent CNN/Opinion Research Corp. poll said inflation was the biggest problem they face.

CPI missed the housing bubble...and bust

Another problem with the CPI figures, according to skeptics, is that it doesn't accurately reflect what's going on in the housing market. That's significant because the cost of buying a home has twice the impact on CPI as does the prices of all nondurable goods combined.

The CPI showed only an 11% rise in home ownership costs from 2002 through 2006, a time that the National Association of Realtors reported that existing home prices soared 34%.

The reason for the low CPI reading is because the CPI looks at equivalent rents, rather than home prices. So inflation was understated during this period, according to Phillips. He argues this may have helped feed the housing boom since it kept mortgage rates lower than they should have been.

Now that the housing boom has gone bust, the CPI appears to be missing the declines in home prices as well; it estimates that the cost of owning a home posted a 12-month increase of 2.6% in April.

But because the CPI figure was so far behind tracking the increase in home values, the housing component of CPI still is leading to a lower inflation reading than what it should be, Phillips said.

The inflation 'con job'

The unusual way that housing prices are estimated isn't the only peculiarity of the CPI report. Over the past ten years, there have been other changes in the calculations, particularly for big ticket items.

Cuts to estimated prices for items like electronics and cars that are thought to have improvements in quality year-after-year have lowered the overall CPI. In addition, changes in the way certain products, such as food, are tracked by the government, have also contributed to lower readings than otherwise expected.

Bill Gross, the manager of Pimco Total Return, the nation's largest bond fund, refers to the CPI as a "con job" that deliberately understates the price pressures faced by Americans in order to keep Social Security payments and other government costs pegged to the index unduly low.

In a report about the CPI, he noted that some of the adjustments don't accurately reflect how much consumers pay for goods. Pimco estimates that the changes have shaved more than a percentage point off the CPI.

"Did your new model computer come with a 25% discount from last year's price?" Gross wrote. "Probably not. What is likely is that you paid about the same price for memory improvements you'll never use."

Another flaw with the CPI numbers is that the government now assumes that higher prices for one item will lead consumers to buy more of a substitution item. That may be true. But if people buy fewer steaks and more hamburgers, for example, it's unrealistic to say that inflation isn't a problem, skeptics maintain.

"The government can claim there's no inflation but all they're measuring is a reduced standard of living," argues Peter Schiff, president of Euro Pacific Capital, an investment firm specializing in overseas investments.

With all this in mind, California economist John Williams argues that CPI is understating inflation by at least 3 percentage points and perhaps as much as 7 percentage points. So instead of an annual inflation rate of 4%, the true number could be between 7% and 11%.

Unemployed, but not counted

Finally, there's the unemployment rate. It was at a relatively low 5% in April. But according to Williams' Web site, ShadowStats.com, the actual rate may be between 8% and 12% if you use a more accurate reading of those out of work.

Even the government's own numbers show there are many unemployed people not showing up in the unemployment rate. The official reading does not include 4.8 million people who want to work but haven't found a job, for example.

Many of these people are dropped from the official calculation because they have become so discouraged from looking without success that they haven't looked in the previous four weeks. Simply adding those people to the number of unemployed takes the current unemployment rate to 7.8%.

The Bureau of Labor Statistics, which produces both the CPI and unemployment readings, says changes in both measures were made to more accurately reflect the real world. The BLS also says the changes have resulted in changes of less than 1% for each measure.

Still, the Labor Department's own broadest measure of unemployment, which includes as jobless those working part-time jobs because they can't find full-time positions as well as some discouraged job seekers, puts the unemployment rate at 9.2% in April, the highest level for that reading in more than three years.

So if you take that number and add that to the 7% that Williams thinks is a more likely annual inflation rate, you're looking at a "Misery Index" of 16.2, much worse than the 8.9 you get from the official numbers.

And while that may seem a bit high, it's probably a more accurate gauge of how bad the economy is for many Americans.

We Can't Handle the Truth?

Paul Volcker was providing testimony to Congress this morning, and it was being covered by Bloomberg television.

Volcker started to 'tell it like it is' and basically laid out the US economic situation in plain and simple terms. We wish we had recorded it. It was 'scathing' to say the least.

To paraphrase, the mathematicians took over with opaque and complex models. The regulators failed. No one likes regulators when times are good, and when times go bad they get all the blame. We had a system fueled by outrageously high compensation, and so the Wall Street firms did not care what they created as long as they could sell it to someone else.

It was starting to get interesting, and then... Bloomberg television cut away so that Betty Liu could tell us how well the stock market was doing, and they never came back.

CNBC was not covering Volcker's testimony. Neither were the C-Spans. CNN? Forget about it.

A friend who was traveling in Europe the past two weeks emailed with the news that 'things are much worse over there and talk of the financial crisis is all over the front pages and people are talking about it." We are in much better shape because no one is talking about it here.

If we had a financial crash and everyone pretended not to notice would it still have happened? We think there are some central planners in the States that would give a resounding 'No.'

So now that Volcker has spoken out, expect the corporate shills and stooges to make snide remarks, and attempt to smear him. This is what they do.

The Consumer Price Index number this morning was a complete fabrication, a farce.

Its time to start noticing, time to stop going with the flow. The flow is heading into madness.

Bloomberg TV cut away just before minute 6 of this excerpt so a clearly disapproving Betty Liu could tell us that the stock market was rallying Mr. Volcker and thank you very much. They never came back or mentioned it again.

Someone sent us a copy of the formal speech which Volcker leafs through on the video. It reads like it was written by staffers and carefully vetted. Very politically correct.

Do yourself a favor and watch the video excerpt. Its only eight minutes long or thereabouts, and its a classic.