Thursday, December 10, 2009

Stiglitz: Overwhelming Force Needed, Government Should Spend Even More

In an interview with Bloomberg, Nobel Prize-winning economist and Columbia University professor Joseph Stiglitz said U.S. lawmakers need to use overwhelming force to cut a 10% unemployment rate. He told the Joint Economic Committee that more government spending and tax cuts are needed:

“There is, in economics, something akin to the Powell doctrine in the military: One needs to attack the problem with overwhelming force,” “As we approach the looming jobs problem, we should not repeat the mistakes we have continually made in responding to this crisis: too little, too late.”

“We should not be fooled by the decline in the jobless rate", “Growth in private demand” will probably be “insufficient to restore employment to normal levels any time soon.”

“Unless action is taken, we risk facing a vicious cycle: unemployment contributing to a weak economy, more mortgage foreclosures, more bad debts, lower demand, and possibly more, but certainly not less, unemployment.”

He also said that unemployment benefits should be extended even more, when record nunber sof people are using them (see earlier post today), and states should be helped since they have revenue shortfalls. The government should give tax credits for weatherizing homes, government jobs programs and research and technology initiatives.

In the meantime, the Treasury Department says that the deficit in November was $120.3B, the 14th straight monthly shortfall, and higher than a congressional estimate of $115B. Receipts were $133.6B; outlays were $253.9B.

Nevertheless, Stiglitz also said that banks and mortgage lenders have been discouraged from restructuring home loans because they are allowed to carry those loans at face value even though many of the mortgages are underwater and likely to result in a default. “I call that marking to hope, not marking to market,”.

Congress should pass a “homeowner’s Chapter 11” bankruptcy reorganization law to make it easier for people to force a restructuring of their mortgage debt. “That would provide a legal backdrop to encourage restructuring,” “We need a homeowners Chapter 11 that treats homes at least as well as we treat corporations.”

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