Stiglitz, a Nobel laureate and member of the College Board of Trustees, and Johnson, the executive director of INET, spent much of their time roundly criticizing what Johnson called the “quality of economic stewardship in our society” in the aftermath of the financial crisis.
Citing fundamental failures on the parts of both the financial sector and government regulators, Stiglitz was adamant that “[the financial crisis] was a man-made event.”
According to Stiglitz, the financial markets have always eventually led to financial crises when left unfettered. The only hiatus in this cycle came during the 35-year period following the Great Depression, an epoch marked by new government regulations on the economy. Specifically, he referred to the creation of the Glass-Steagall Act and the Securities and Exchange Commission, which reined in financial markets.
The problem, Stiglitz said, was the success of these regulations: “They worked so well that people came to believe that we didn’t need them.” That thinking was influenced in large part by the economic boom prior to the turn of the millennium, which encouraged financial deregulation.
As a result of that culture, which was not limited to the end of the millennium, an intransigent academic atmosphere was engendered in the heart of economics — profoundly affecting our economy today, Stiglitz explained.
Wall Street, awash in bailout money, has shouldered much of the blame for the crisis, but Stiglitz was quick to point out that bailout money might be the least of taxpayers’ concerns. Wall Street on the most fundamental economic level has exemplified one of the most troubling aspects of the modern economy: the severance of the link between productivity and performance.
Wall Street employees who had reaped exorbitant bonuses on the heels of record losses have reinforced a distorted view of the economic incentives for productivity. Stiglitz claims that the cost of human capital that Wall Street has imposed on the economy is tremendous. Its bankers and traders who could have chosen any number of career paths, but instead went to Wall Street under the guise of these distorted incentives.
From there the discussion turned to politics. Johnson and Stiglitz’s main implication was that government remains the central channel through which change can be made. Johnson attacked the pervasive notion about the incompetence of government: “It is not a logical truism that government is awful — even if we might agree that the American government in this recent period has been very dysfunctional.”
Johnson acknowledged that “there are those who believe that the cure is worse than the disease,” responding to a question about the role of the government after it had dispensed the bailout money. Both he and Stiglitz, however, were convinced that underlying issues in the economy that caused the crisis, and that these issuses must be regulated.
In political terms, Stiglitz said that “the [economic] model precludes the policy decision,” a link that Johnson and Stiglitz used to underscore the importance of INET. One of INET’s central tenets would be an emphasis on the exploration of economic inequality, a problem that has long been justified in terms of productivity, but which has become more pressing in light of the financial bailouts.
INET, founded by billionaire philanthropist George Soros, has been touring academic institutions around the world. Johnson and Stiglitz paid a visit to Williams College prior to their discussion at Amherst, with a visit planned for Swarthmore as well. “We’re starting the conversation with students, hoping to engage more people, and start to increase our influence at this level,” Johnson said.