Professor Stiglitz outlined the events that led to the global financial crisis, as discussed in his new book, Freefall: Free markets and the sinking of the global economy.
He said that prior to the crisis, the US was living in an unsustainable “bubble”.
He said: “Somewhere between two-thirds and three quarters of our growth was related to real estate. House prices were soaring while the income of most Americans was going down. Almost all the growth was going to very few people at the top. We were consuming beyond our means.”
Professor Stiglitz said the situation was made worse by a mistaken belief that markets were self-correcting.
“What happened was that government kept saving the market and because it did such a good job the market began to think it was saving itself,” he said.
“The banks that were being bailed out by government had failed in their basic job of assessing creditworthiness. They loaned to people who couldn’t pay. Government bailed them out and that led them to engage in more and more of these bad lending practices.”
Professor Stiglitz said the stimulus packages introduced by governments around the world after the crash did work – particularly the Australian one, which he considered the most effective.
But he said the American one was not well-designed and was too small.
He added: “There was a big economic and political mistake in leaving those who made the mess in charge.
“Some of the people in charge in the Obama administration were the very ones who pushed extreme deregulation,” he said.
“They wanted to believe that the economy was only going through a temporary bump. The result was a package that was not strong enough and that means that two or three years after the bubble has broken the economy remains weak.”
Professor Stiglitz described the crisis as a “slow train wreck”.
He said: “We had this bubble, and the consequences of that bubble breaking were predictable and predicted. Every bubble breaks and has severe economic consequences. In this case it was an economic and financial meltdown.”
He said there was now a need for an alternative approach that would restore the appropriate balance between markets and government, which had been lost in the run-up to the crisis.
He said: “Professor Stiglitz has an outstanding international reputation for his contribution to economic theory and policy. We were extremely fortunate to have such a distinguished scholar giving a lecture at Murdoch.”
A podcast of Professor Stiglitz's presentation is available on Lectopia.