Saturday, September 20, 2008

More on the Wall Street Meltdown

Joseph Stiglitz on the Wall Street Crisis

Joseph E. Stiglitz, professor at Columbia University, was awarded the Nobel Prize in Economics in 2001 for his work on the economics of information and was on the climate change panel that shared the Nobel Peace Prize in 2008. Stiglitz, a supporter of Barack Obama, was a member and later chairman of the Council of Economic Advisers during the Clinton administration before joining the World Bank as chief economist and senior vice president. He is the co-author with Linda Bilmes of the "Three Trillion Dollar War: The True Costs of the Iraq Conflict."

For all the new-fangled financial instruments, this was just another one of those financial crises based on excess leverage, or borrowing, and a pyramid scheme.

The new "innovations" simply hid the extent of systemic leverage and made the risks less transparent; it is these innovations that have made this collapse so much more dramatic than earlier financial crises. But one needs to push further: Why did the Fed fail?

First, key regulators like Alan Greenspan didn't really believe in regulation; when the excesses of the financial system were noted, they called for self-regulation -- an oxymoron.

Second, the macro-economy was in bad shape with the collapse of the tech bubble. The tax cut of 2001 was not designed to stimulate the economy but to give a largesse to the wealthy -- the group that had been doing so well over the last quarter-century.

The coup d' grace was the Iraq War, which contributed to soaring oil prices. Money that used to be spent on American goods now got diverted abroad. The Fed took seriously its responsibility to keep the economy going.

For the rest of the article including Prof. Stiglitz’s prescriptions to address the crisis go to

On a related note regarding the AIG bailout and the massive Federal bailout planned to be unveiled next week, Jonathan Tasini over at the Working Life blog had some excellent questions to ask:
1. What is this going to cost us?

2. Since many of the very people who made this crisis happen made off with billions of dollars over time in compensation, shouldn't this tab be paid for by a tax hike on the wealthiest Americans?

3. What assurances will the public get that we are now going to clean house? The CEOs and managers and their ilk should be permanently barred from having a hand in this business.

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