Stiglitz: The economic consequences of Mr. Bush

John Maynard Keynes wrote "The Economic Consequences of the Peace" shortly after resigning from the British team negotiating the Treaty of Versailles. That treaty set the reparations requirements from the losers of World War I. In that short book, he correctly identified the consequences of the economic vise imposed by the allied victors on Germany. The consequences? Impossible economic contradictions, social unrest and a fertile field for the kind of desperation that fueled the Third Reich.

Keynes also wrote a shorter piece later, "The Economic Consequences of Mr. Churchill," pointing out the dreadful consequences of the latter's insistence on a macho currency regime.

Now we have Joseph Stiglitz and "The Economic Consequences of Mr. Bush," in Vanity Fair. This is a well-deserved excoriation of the performance of the president since taking office. The consequences are grim. Stiglitz is the best economist practicing today. Read it.

Stiglitz had it nailed from the beginning

The housing crash was inevitable . I didn't know how much we agreed until I read Stiglitz' piece today. Joseph Stiglitz is the most competent economist in the country.

Among other things:

There is a macro-story and a micro-story here. The macro-story is simple, but dramatic. Some, observing the crash of the sub-prime mortgage market, say, “Don’t worry, it is only a problem in the real estate sector.” But this overlooks the key role that the housing sector has played in the US economy recently, with direct investment in real estate and money taken out of houses through refinancing mortgages accounting for two-thirds to three-quarters of growth over the last six years.

Booming home prices gave Americans the confidence, and the financial wherewithal, to spend more than their income. America’s household savings rate was at levels not seen since the Great Depression, either negative or zero.

With higher interest rates depressing housing prices, the game is over. As America moves to, say, a 4% savings rate (still small by normal standards), aggregate demand will weaken, and with it, the economy.