Another Recession?

Sept. 8 (Bloomberg) -- Nations in Asia and Europe wouldn’t automatically return to recession if the U.S. economy contracts again, Nobel Prize-winning economist Joseph Stiglitz said.

Stiglitz forecast last week a “significant chance” the U.S. will slip back into recession after a brief recovery. While that would have a “negative effect” on the rest of the world, it wouldn’t prevent other economies from expanding, he said in an interview today in Reykjavik, Iceland.

“Asia is restructuring itself to be less dependent on the U.S. and they have huge reserves,” (Malaysia have huge deficit) Stiglitz, a Columbia University professor, said. “So they could continue on the path of recovery.”

Although it would be “very hard for Europe to have a robust recovery with a weak America,” Stiglitz said, “one of the things that brought down the markets over the world was the credit crunch. The credit crunch was a result of a total lack of faith in the banks. What we’ve done is we’ve put enough capital in the banks, so people are probably willing to say that the banks can meet their obligations.”

That doesn’t mean the U.S. banking system is out of the woods, he said. There are still millions of mortgages in the process of being foreclosed, and commercial real estate “is in a shambles,” Stiglitz said. That makes it likely many more banks will be taken over by the government, although “enough conniving between the regulators and the banks might get us to muddle through.”

The U.S. government doesn’t want a major bank to fail and imperil the financial system, he said. “Banks aren’t bankrupt unless the government says they are,” Stiglitz said. “So there is a reasonable chance that even if the banks are truly bankrupt, they won’t be bankrupt.”

Stiglitz, 66, won the Nobel Prize in economics in 2001 for showing that markets are inefficient when all parties in a transaction don’t have equal access to critical information, which is most of the time. He is also the former World Bank chief economist and an adviser to former US President Bill Clinton.

Read Joseph Stiglitz "US Economy May Not Be Sustainable" HERE