Nobel Laureate Contradicts Wall Street’s Forecast that “Worst Is Overâ€
“This is going to be one of the worst economic downturns since the Great Depression,†said Columbia University’s Nobel Prize laureate Professor Joseph Stiglitz in an April 25 CNBC interview. Stiglitz’s comments contradict Wall Street executives who recently claimed the worst was over. Those same Wall Street executives made similar statements last October when they suffered losses in the billions of dollars. What will Stiglitz’s bleak forecast mean for investors?
Stiglitz contends that because the main cause of the current recession is historically unique, solutions are harder to uncover. Past recessions resulted from inflation or over-abundant inventories. According to Stiglitz, this downturn came about because of “badly impaired†financial institutions and banks unable to lend capital. Now, the borrowers who historically lead the country out of recession face uncertainty about the best course of action.
Even though inflation didn’t play a primary role in starting this recession, it remains a huge concern, Stiglitz said, with skyrocketing oil prices and increasing food prices potentially hurting businesses and alarming consumers. “Oil is particularly bad,†he said, with additional dollars “going abroad.â€
In addition, the housing crisis contributes to a drawn-out recession. Â Previously, Americans withdrew billions of dollars through home equity loans. Unfortunately, they often consumed that money instead of investing it. Now plummeting home values compromised an important spending source, leaving homeowners with little, if any, equity to draw upon.
Prior to the current recession, the savings rate was zero. According to Stiglitz, savings will now “go up,†leading to reduced consumer spending and deteriorating retail sales.
Stiglitz concluded that, “The Bush Administration’s [economic stimulus package] is too little, too late, and very badly designed.†The tax rebate checks are a “drop in the bucket†compared to cash held back or siphoned out.“
If you really wanted to stimulate the economy, increase unemployment insurance,†he said. “The President is telling people to go out and get jobs—and there are no jobs for them.†Unfortunately, the longer the recession drags on, the more consequences for investors.
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