KUALA LUMPUR — The United States could face a prolonged economic downturn because of its sub-prime mortgage woes, but is unlikely to plunge into a recession, said Nobel economics laureate Joseph Stiglitz yesterday.About 1.7 million Americans may lose their homes because of foreclosures and bankruptcy this year, piling further pressure on house prices, said Mr Stiglitz, a former World Bank chief economist, who is in Kuala Lumpur to attend a conference.
Wages have stagnated although the US gross domestic product was 20 per cent higher now from six years ago.
“We don’t know how well the (US Federal Reserve) will respond,” he added. “The lack of transparency means we don’t know how deep the problem is.”
He said the credit crunch was a “totally predictable disaster” because of US President George W Bush’s economic policies in 2001 when Mr Bush cut taxes for the rich, slashed interest rates and encouraged people to borrow more than they could afford to stimulate the economy.
America is living beyond its means, borrowing some US$850 billion ($1296 billion) last year, while household savings in the country is nil or negative, he said.
“President Bush has mismanaged the economy very badly,” Mr Stiglitz said. “The magnitude of total government borrowings in the eight years of his presidency will be over US$4 trillion ($2.93 trillion).”
Mr Stiglitz, who won the Nobel Prize for economics in 2001 and is author of Globalization and its Discontents, warned that the next US administration faces a tall task in restoring fiscal sanity as this involves cutting back on expenditures or raising taxes — which could lead to bigger budget deficits.
Mr Stiglitz indicated that East Asian countries may not be severely hit by the US fallout, as the region has built large reserves and is much more resilient after rebounding from its own financial crisis a decade ago. — AP
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