Posts Tagged ‘joseph stiglitz’

Iraq War Will Cost the American Economy $3 Trillion

September 1st, 2010 Comments off

President Barack Obama is scheduled to address the nation on the end of the American combat role in Iraq. Fifty thousand troops will remain behind to train the Iraqi security forces, and with massive bases remaining and the country’s biggest embassy located in Baghdad, it is clear that a long-term U.S. presence in Iraq is foreseen. The road has been a long one since the previous president, George W. Bush, formally announced the “end” of American major combat operations in Iraq from the deck of an aircraft carrier, more than 7 years ago.

One can debate about the merits of the American military invasion and occupation of Iraq ( I happen to believe it was a major strategic blunder) but what cannot be debated, apart from the human toll, has been the frightful cost to the U.S. economy. In 2008, two distinguished academicians, Nobel Prize winning economist  Joseph Stiglitz  and his colleague, Linda Bilmes from Harvard University, published the most comprehensive analysis of the actual cost, current and future, of America’s Iraqi adventure. Their conclusion, published in 2008, was that the ultimate expenditures of the American taxpayers due to the Iraq war and its aftermath will be at least $3 trillion. They labeled their study, quite appropriately, “The Three Trillion Dollar War.”

In the current economic purgatory that America finds itself in, it is astonishing that no policymaker has been held accountable for this $3 trillion “mistake” (mistake, that is, for those who believe the invasion was really based on the claim that Iraq possessed weapons of mass destruction-as opposed to reengineering the Middle East and securing oil resources).  However, these same policymakers tell us to relax, the war was placed on the nation’s proverbial credit card, so it will be the children and grandchildren of America who will eventually pay for the Iraq military conflict. But what about the costs of the Afghanistan war, which will likely reach and may exceed the figures that  Stiglitz and Bilmes calculated for the Iraq conflict? Add them all up together, factor in the structural mega-deficits and costly financial bailouts engineered by the politicians in Washington, and one cannot escape the conclusion that it will be bankruptcy, not victory, which will be the final outcome and legacy of America‘s war on Iraq.

Ireland’s Banking and Economic Crisis: Toxic Loans Surpass Estimate of Irish Government

March 31st, 2010 Comments off

Prior to Greece becoming the economic and financial basket case of Europe, it was Ireland that held that  dubious distinction. For when the global economic and financial crisis detonated with full fury in the fall of 2008, Ireland’s own version of the real estate asset bubble imploded, transforming the balance sheets of the nation’s major banks into a toxic waste dump.

As with  America and the UK, Irish politicians informed their nation’s citizens that the big banks must not be allowed to fail, and therefore the taxpayers would pay for the egregious financial miscalculations of the high-priced “talent” that led these Irish  financial institutions into the abyss. While the United States came up with its TARP taxpayers bailout, Ireland formulated its own unique response, the so-called NAMA, the acronym for National Asset Management Agency. NAMA was, in effect, a “bad bank,” which would take the toxic assets off the balance sheets of Ireland’s large banks, in particular the Anglo Irish bank, in return for sovereign bonds. The expectation was that Irish taxpayers would have to accept large losses, but in return the nation’s banks would return to fiscal health, and be able to resume normal patterns of credit and loan creation.

The “bad bank” approach had many critics, appalled that taxpayers money was being used to backstop  private sector losses, in exchange for vague promises by politicians that the end result would be therapeutic for the national economy’s ills. No less an authority than Joseph Stiglitz, Nobel prize winning economist, expressed great scepticism over the efficacy of Dublin’s taxpayer funded bank bailout. Onward with the “bad bank” concept the government proceeded, anyways, oblivious to its critics.

Now the Irish political leadership has informed its sombre citizenry that the banking crisis was far worse than first believed. When NAMA was first established, the authorities believed that the toxic loans being acquired for the “bad bank” would need to be discounted by 30%. Now, an embarrassed government concedes, the actual discount of these toxic loans are coming in at a far worse level, a miserable 47%. Ireland’s beleaguered Finance Minister, Brian Lenihan, has stated that the Anglo Irish bank alone would be receiving from the taxpayers €8.3 billion in just the coming week, with a strong possibility that an additional €10 billion would almost certainly be required to cover anticipated losses at Anglo Irish Bank. All told, it is now being declared by Dublin that toxic loans by Ireland’s banks may cost taxpayers  a staggering €32 billion, equal to more than $43 billion at the current exchange rate. Considering that Ireland has a population of 6.2 million, this reflects a charge of nearly $7000 for every Irish man, woman and child towards the cost of bailing out financial institutions that, in the words of Finance Minister Lenihan, “played fast and loose” with Ireland’s national economy.

Obama Speech Warns of Economic Armageddon

January 9th, 2009 Comments off

Less than two weeks before his inauguration as America’s 44th President, Barack Obama delivered a major speech on the U.S. economy. The essence of his message is that Congress must quickly pass an economic stimulus package with a vast price tag, possibly in the range of a trillion dollars, or face economic Armageddon. With an apocalyptic tone, President-elect Obama delivered a sobering message. Undoubtedly, the economic crisis is even more dire than described in Obama’s speech.

Joseph Stiglitz, a Nobel Prize winning economist who was chairman of the White House Council of Economic Advisors during the Clinton administration, has joined the chorus of economic specialists warning that the global economy is going down the proverbial sink-hole, with the U.S. economy serving as the financial locomotive of this global train wreck. Among the destructive economic and financial forces he has recently written and commented on is the whole phenomena of de-leveraging.

According to Stiglitz, “America’s economy had been supercharged by excessive leveraging; now comes the painful process of de-leveraging. Excessive leveraging, combined with bad lending and risky derivatives, has caused credit markets to freeze. After all, when banks don’t know their own balance sheets, they aren’t about to trust others.”

Despite massive efforts by the Fed in the U.S. and central banks across the globe to unfreeze credit markets, the financial arteries of the world remain clogged. Though some shrinkage in the Libor rates and Ted Spread has occurred, the overwhelming degree of counter-party risk has eroded the element of trust to such an extent, monetary policy by central bankers cannot overrule human sentiment. The recent Madoff Ponzi scheme that may have bilked investors out of $50 billion has had far greater impact in defining the state of trust in the marketplace than near-zero interest rates being offered by central bankers.

The credit crunch may impact the massive economic stimulus package being proffered by Obama as the one great hope of salvaging the U.S. and global economy. To finance the massive amount of spending being planned by the incoming Obama administration, upwards of a trillion dollars of additional deficit funding will have to be borrowed, primarily from foreign creditors such as China. However, with China now requiring massive funding for its own economic stimulus spending, that nation and other foreign creditors may not be as readily available for financing U.S. government debt spending. Counter-party risk exists not only among private investors and institutions; foreign countries and sovereign wealth funds may prove as tight with their willingness to loan money, especially to an American government that is projecting trillion dollar plus deficits for years to come.

If the U.S. is unable to finance its massive deficit spending plans, what then? Perhaps economic Armageddon does loom in out future, as the Global Economic Crisis widens its vortex of destruction and doom.