Joseph Stiglitz on the GFC

Joseph Stiglitz is a Nobel Laureate in Economics, and currently a professor at Columbia University. In 2001, Stiglitz was awarded the Nobel Memorial Prize, along with Michael Spence and George Akerlof for their contribution to the theory of asymmetric information. Stiglitz also served as an economic advisor in the Clinton Administration.

This lecture "Who Sank the Global Economy" was presented at the University of Queensland and has been aired on Big Ideas on the ABC. Stiglitz highlights the failure of market forces in this financial crisis, the failure of government policy to prevent the GFC and the ineffectiveness of the US policy response to the GFC.

"Toxic assets were sold all over the world", and has contributed to making the financial crisis global. "40 percent of toxic assets or bad mortgages were sold to Europe; Australia did not buy many toxic assets due to good regulators" - One of the reasons why Australia was relatively sheltered from the GFC compared to the US and Europe. 

"Without the Keynesian stimulus, the world would have faced a global depression. In the US, without the stimulus the unemployment rate, instead of going up to 10 percent, would have gone up to 12 percent. But the unemployment rate still went up to 10 percent so the stimulus package was insufficient. The reason for this is the stimulus package was too small and poorly designed. Too much was spent on ineffective tax cuts...people were burdened with high levels of debt and were not spending (the tax cuts were insufficient to encourage spending)...whilst the government was spending more, states were contracting and laying off workers (contradicting policies on a federal and state level led to ineffective stimulus policy)....The Australian stimulus was not only timely but also well designed...as Australia had the shortest and shallowest downturn.

Interesting question in the Q&A session on Australia's resource boom - Stiglitz suggests that a significant portion of the resource boom profits should be put in stabilisation fund that should be kept abroad, as this would help avoid the appreciation of the dollar. He also points out that when Australia extracts and exports resources, the resources are being depleted and Australia's assets are depreciating. Hence, an adequate mining tax is necessary as an additional revenue stream to fund government investments in order to secure the future of Australia.