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Sunday, 27 September 2009

Stocks a poor indicator: Stiglitz

NEW YORK - NOBEL economist Joseph Stiglitz said on Friday a rising stock market is not a good indicator of how the economy will fare, saying falling wages may help corporate profits without spurring increased demand for goods and services.

Mr Stiglitz, a Columbia University professor, told a corporate governance and securities regulation conference events of the last year have created distorted markets that are 'tilted' in favour of companies deemed 'too big to fail'.

The conference marked the anniversary of Lehman Brothers Holdings Inc's and the first bailout of the insurer American International Group Inc. These have become signature events that helped drive the United States, and much of the world economy, into what is widely considered the worst financial crisis since the Great Depression of the 1930s.

US stocks have recovered well over half their losses following Lehman's Sept 15, 2008 failure.

Unlike increasingly voluble analysts who believe the gains have come too fast, Mr Stiglitz, 66, said stocks 'may be doing well in the next period,' while adding he did not 'have a lot of confidence' in that view.

He said, though, that there is a disconnect because the labour market is 'very weak, much weaker' than the 9.7 per cent US unemployment rate suggests. Lower wages can mean lower expenses for companies, which can translate to higher earnings that would be reflected in rising stock prices.

'Stock market performance is not going to be a good indicator of how well the economy is going to be doing,' Mr Stiglitz said. 'Wages are going down, profits are going up, but for an economic recovery, if wages are going down, it's not going to be strong aggregate demand, and it's very hard to have a strong recovery for our economy.'

Echoing comments by Paul Volcker, a former Federal Reserve chairman and an adviser to US President Barack Obama, Mr Stiglitz also said federal efforts to prop up companies deemed too big to fail had led to greater concentration in banking. 'Things are much worse than they were a year ago' in that respect, Mr Stiglitz said.

The economist said companies deemed too big to fail should face 'very tight restrictions on all of their risk taking, including their incentive structures.' He said this could help insure that the next AIG or Lehman problem does not surface.

'The whole market is tilted toward the too-big-to-fail institutions, and so we're putting in place a system that will in time lead to more and more distortions,' he said. 'Would you rather buy a credit default swap from an institution that has a government guarantee, or one that does not?'

Mr Stiglitz, who received the Nobel Prize for economics in 2001, was a member of the White House's Council of Economic Advisers under the Clinton administration and chief economist at the World Bank in the late 1990s. -- REUTERS

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