Stiglitz backs Whitney on pessimistic bank outlook
Posted on 15 September 2009 with no comments from readers
Nobel prize winner Joseph Stiglitz, former chief economist at the World Bank and member of the White House Council of Economic Advisers, has warned that the world economy is ‘far from being out of the woods’ even if it has come back from the cliff-edge reached after the collapse of Lehman.
‘We’re going into an extended period of weak economy, of economic malaise, the US will grow but not enough to offset the increase in the population,’ he said, noting that ‘if workers do not have income, it’s very hard to see how the US will generate the demand that the world economy needs.’
Monetary stimulus
He commented that the Federal Reserve is in a ‘quandary’ in ending its monetary stimulus because this will inevitably drive up the cost of borrowing for the US Government. ‘The question then is who is going to finance the US Government’, he added.
‘In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Professor Stiglitz told Bloomberg in an interview yesterday in Paris. “The problems are worse than they were in 2007 before the crisis.’
His remarks came before a statement by US President Barack Obama yesterday about his determination to pursue reform on Wall Street to avoid a repeat of last autumn’s near meltdown. Professor Stiglitz said it was not a question of whether the administration would do something but whether it would be enough.
This skepticism on the outlook for the banking system followed remarks in a CNBC interview last week by top US banking analyst Meredith Whitney who previously warned of the sub-prime crisis before it happened.
Unemployment and house prices
She is also leery about the immediate future for the banks and has a single buy call on Goldman Sachs. Her view is that rising US unemployment is going to send house prices down further and renew the pressure on bad loans at the banks, and that bank stocks look ripe for a correction as soon as next month.
Any correction in bank stocks will renew the pressure on the banks to raise additional equity and threatens to turn into a downward spiral in a reversal of the upward leverage seen since the lows of March this year.
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Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.
By Ambrose Evans-Pritchard, International Business Editor
Published: 11:59PM BST 14 Sep 2009
Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).
“There has been nothing like this in the USA since the 1930s,” he said. “The rapid destruction of money balances is madness.”
The M3 “broad” money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.
Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an “epic” 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.
“For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew,” he said.
It is unclear why the US Federal Reserve has allowed this to occur.
>> Mr Congdon said IMF chief Dominique Strauss-Kahn is wrong to argue that the history of financial crises shows that “speedy recovery” depends on “cleansing banks’ balance sheets of toxic assets”.
>> It is unclear why the US Federal Reserve has allowed this to occur.
I don’t buy it for a minute. Look behind the facade and it’s obvious who these people are. Dominique Strauss-Kahn in his early years was a member of the French Union of Communist Students.
Appears that these central banks are intentionally causing a depression, into order to launch a revolution out of the poverty. Bernanke admitted that the Fed caused the 1930’s depression.
The Marxists moved in to organize the poor and unemployed. FDR was surrounded by Communists and Soviet agents of influence.
Today we have Obama, with his cousins in Kenya descended from Communist revolutionaries. His autobiography admits that he associated with socialists. He placed an open Maoist into his administration, as well as an open Socialist.
This is the reality that the press and academia completely blackout.
Joseph Stiglitz is one of the very, very few competent economists left in the US.
Any fairly intelligent person who studied first year economics, and who observes (as Ambrose Evans Pritchard said) deflation in credit, wages and rents can not possibly be thinking “green shoots.”
The other dude, Krugman, is simply an incompetent stooge who is the “mouthpiece” for the US government’s propaganda.