Economy Watch: 'Stiggling' Our Way to Socialism

I propose a neologism, “to stiggle,” meaning to make uneconomic loans for political reasons, in honor of Nobel Laureate Joseph Stiglitz. If only we had nationalized the banks, he complains, we would have been able to force the banks to make uneconomic loans that they did not wish to take and that their borrowers did not wish to accept:

Nov. 2 (Bloomberg) — Nobel Prize-winning economist Joseph Stiglitz said the world’s biggest economy is suffering because of the U.S. government’s failure to nationalize banks during the financial crisis.

“If we had done the right thing, we would be able to have more influence over the banks,” Stiglitz told reporters at an economic conference in Shanghai Oct 31. “They would be lending and the economy would be stronger.”

Stiglitz has stuck with his view even after the U.S. economy returned to growth in the third quarter and as banks’ share prices climbed this year.

U.S. Treasury Secretary Timothy Geithner, appearing yesterday on NBC’s “Meet the Press” program, said the country’s economic recovery hinges in part on banks taking more risk and restoring the flow of credit to businesses.

“The big risk we face now is that banks are going to overcorrect and not take enough risk,” Geithner said. “We need them to take a chance again on the American economy. That’s going to be important to recovery.”

President Barack Obama said on Oct. 24 that the nation’s lenders, supported by taxpayers in the crisis, need to “fulfill their responsibility” by lending to small businesses still struggling to get credit.

Companies such as Citigroup Inc. and Bank of America Corp. benefited from a $700 billion taxpayer-funded bailout package last year. In contrast, Obama said that too many small businesses are still short of money, adding that his administration will “take every appropriate step” to encourage banks to lend.

Bank Lending

“We have this very strange situation today in America where we have given banks hundreds of billions of dollars and the president has to beg the banks to lend and they refuse,” Stiglitz said. “What we did was the wrong thing. It has weakened the economy and has increased our deficit, making it more difficult for the future.”

I noted in this space on Oct. 28 (previous post) that the 10% annual rate of decline in banks’ commercial and industrial loans is the fastest since the Fed began keep records sixty years ago. There still is a devastating crunch for Main Street businesses. Main Street’s distress is reflected in the collapse of commercial real estate rentals and the related bust in the commercial property market.

Can we stiggle our way to prosperity by forcing the banks to lend? Well, the Obama adminstration has funded several enormous stiggles, including the $8,000 first time homebuyer tax credit and the $4,000 per car “cash for clunkers” subsidy. These had the very temporary effect of pumping air into third-quarter GDP. Friday’s stock market acknowledge the transient nature of the boost, particularly after the dismal September consumer spending report.

Consumers won’t spend, so the mass of American small businesses: retail stores, real estate brokers, mortgage bankers, body shops, and the whole range of providers to the consumer economy have to shrink. They aren’t borrowing because they are cutting back. They can’t be stiggled back into activity.

Comments

[traineeinve...:]

So the politicians call for banks to "take a chance" by making more risky loans while at the same time they are imposing more stringent risk management controls and capital requirements on the same banks through Basel II?

The only question this raises is whether this is a demonstration of ignorance or hypocrisy?

Nov 02 03:32 AM

[socrateaz:]

Where is the money? The wealth has to come from where it is! The foriegn money from bad balance of trade can not be easily reached. Production needs to be increased. But retuirn for production does not bring adequate reward so money does not go there! Government has gone from a small vacuum sucking up moneys for little benefit to a giant high powered vacuum witch leaves little for the producer. I believe only shortages will cause the producers to become more fairly rewarded. It will come. Right now the government is trying to squeeze juice from dry produce. You get some but it will not quench a big government s thirst. Interesting days ahead

Nov 02 08:04 AM

[Ferdinand E...:]

Personnally I think that the English language is quite OK, and so I am going to vote against the introduction of off-the-wall terms like 'stiggle'. As for nationalizing the banks, which apparently Mr Stiggleitz proposed, this is NOT socialism. It is just crank.

Nov 02 08:32 AM