Stiglitz believes the underlying problem of growing economic inequality as the culprit of the subprime mortgage crisis which triggered a financial crisis and it is the dollar-dominated reserve system that allows the US to export the crisis and make it truly global.
"Growing economic inequality means that we are moving money and assets from those who can spend it at the bottom to those who cannot spend it at the top. We told the people in the bottom to consume and kept lending to them." Stiglitz explained that the inequality has created the needs of deregulation and loose monetary policy to stimulate the economy, which resulted in excessive liquidity and the housing bubble in the US during 2003 to 2007.
He went on to emphasize that the growing inequality "is not just in the US but in most of the countries in the world." The abundance of empty houses and homeless people in the US and the problem of poverty and massive unemployment resources in developing countries show "the system of bringing together supply and demand is not working", which is "a fundamental problem needs to be addressed."
Hence, Stiglitz called the world to redirect economy in ways consistent with the vision of the future and address long standing needs but not recreating failed system. He gave credit to China’s 11th Five Year Plan to build an innovative economy to restructure the economy to be more environmentally sound and the current effort to move the economy from more export dependency to more domestic oriented to focus on domestic consumption and investment.
Outside the US, especially in the developing countries in Asia, governments�buildup of high foreign reserve has also attributed to the insufficient aggregate demand, which is believed by Stiglitz as a consequence of IMF’s bad management of the Asian financial crisis in 1997 to 1998. And the shortfall of consumption the developing countries has been made up by over-spending of the US. "It's clearly a very strange global economic phenomenon that the global economic system requires the richest country to consume beyond its means to keep the global economy growing."
Meanwhile, it is also an irony that when the global crisis is spreading from the US to the rest of world, people in the developing countries are converting their own currencies into US dollar and thus strength the greenbacks despite of the lurking danger of dollar debasement.
Stiglitz described the global reserve system based on a single currency as problematic since the whole world has to look at a single country’s economic and political situation and developing countries have to lend money to the richest country at almost zero interest rate rather than spend it at home.
He reckons this actually exacerbates the world’s insufficient aggregate demand and calls for a diversified global reserve system or to expand and create more regional reserve systems such as the one stated in Chiang Mai initiative, which suggest China, Japan and Korea to contribute to 80 per cent of the pool of funds to help the additional 10 countries in Asia in the time of crisis and needs.
Parallel to the new global or regional reserve systems, Stiglitz called for the creation of new multilateral institutions other than the IMF and the World Bank. Though the IMF has been urging donors to provide more funds for it to provide facilities to developing countries, Stiglitz described the IMFas "not a good place to give money to" due to its "Wall Street" mentality and history of pushing through deregulation and pro-cyclical policies which have caused problems for the world’s economy. He said IMF’s such "history" has caused some countries reluctant to go to IMF, which the effort of designing a global stimulus package is undermined.
He said, there is "a need to create a diversified way of disbursement", including the consideration of creating new facilities, new institutions, new lending arrangements and new management systems, which takes into better consideration of both developing countries and donor countries. He regarded the initiatives in Asia for creating Asian Momentary Fund and similar efforts made in South America would provide diversified support for developing countries.
Stiglitz believes that China has a viral role to play in the financial crisis by providing support to developing countries. "China and other countries could very quickly create a new facility to derive money" to give the money to help other countries, "in a way consistent with China’s diplomatic principle, and consistent with macro-economic needs."