September 18th, 2008
07:30 AM ET

Nobel prizewinner: 6 ways to fix Wall Street

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Joseph Stiglitz
Professor, Columbia University

Editor's Note: 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.

Many seem taken aback by the depth and severity of the current financial turmoil. I was among several economists who saw it coming and warned about the risks.

There is ample blame to be shared; but the purpose of parsing out blame is to figure out how to make a recurrence less likely.

President Bush famously said, a little while ago, that the problem is simple: Too many houses were built. Yes, but the answer is too simplistic: Why did that happen?

One can say the Fed failed twice, both as a regulator and in the conduct of monetary policy. Its flood of liquidity (money made available to borrow at low interest rates) and lax regulations led to a housing bubble. When the bubble broke, the excessively leveraged loans made on the basis of overvalued assets went sour.

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?

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Filed under: Economy
soundoff (6 Responses)
  1. Andy - Atlanta, GA

    Barack, you need to get this guy on your team.

    September 18, 2008 at 11:42 am |
  2. Keith

    Perhaps obama should have worked on an economics degree from you while he was at CU. I understand that he has shown a lack of interest in visiting or even writing about his time at CU, perhaps even less than at Occidental. Maybe it has to do with the rousing cheer he received when, at the forum with Sen. McCain, he called for the reinstatement of the ROTC program.

    September 18, 2008 at 11:10 am |
  3. Jim

    I'm not a Nobel Prize winner,nor a econimist but I'll put in my 2 cents worth.- Why did the Fed fail? They forgot the lessons of hard times of the past-
    1. If you cannot pay cash for it- don't buy it.
    2.Trust a Bank only as far as You can throw their building.
    3.When times are good pay your bills ahead as far in advance as you can.
    4.make due with what you have- if you have a 1976 truck that runs good, is easy to take care of,costs little to register & insure, don't get a brand new car that takes a rocket scientist to fix & maintain.
    5. Common sense- live with in your means- when your outgo is greater than your income, your upkeep will be your downfall.

    September 18, 2008 at 10:39 am |
  4. Praetorian, Fort Myers

    While Mr. Stiglitz is correct that President Bush's response to the housing bubble–that we had just built too many houses is right on the money, his own expert view is even more simplisitic–he's one of the most brilliant minds on the subject–Bush is not (for sure).

    While excess leverage, over borrowing, modern pyramid schemes, and let's not forget– cavalier attitude about ivestor risk there is more to this problem.

    For decades–and especially in the past decade–our business culture has changed. This can be traced directly to our nations schools of business and graduate business educational institutions. Our business executives have created a culture–where winning is everything. Even (in past history) inconsequential dips in overhead, costs, profit margin–bode poorly for the man or woman in charge of that piece of business–they are replaced without hesitation, or at the very least lose out on good performance reviews and bonuses.

    Our government–may be able to help some. But McCains idea of a federal commission should not only look at business practices–but include educational experts to provide insight on changing the business paradigm that has evolved. Regulation–practical, limited, and prudent will help–but what we need most is to return to fundamental best business practices–inluding solid ethics, loyalty, reasonable profit, and the reality that failure–is natural–and leads ultimately to success. Lastly...costing cutting of materials, supplies, fixtures, overhead–are great ways of improving the bottom line...but people should be the last resource to eliminate.

    September 18, 2008 at 9:12 am |
  5. Annie Kate

    Your 6 ways to fix Wall Street sound reasonable from the little I know of economics. I did notice though that it was to fix Wall Street to prevent this from happening again – what do we do to get the economy going again without hurting people more than they are already hurting? I agree that its necessary to prevent this from happening again but we need some relief in the interim – so how does the economy get going again?

    Annie Kate
    Birmingham AL

    September 18, 2008 at 9:11 am |
  6. Cindy

    This housing bubble was caused by greed pure and simple! These banks wanted to make easy money, or so they thought. So they gave out loans to anyone and everyone even though these people had no business what so ever buying a house that they very clearly could not afford. Then when it came time to pay up they couldn't therefore the banks lost big time. And that's why we are were we are today.

    I can definitely tell the writer is an Obama supporter since he made every explanation to what occurred lean good in Obama's way. The truth is the dems are just as much a part of the problem as the reps. They have sat back and done absolutely nothing for two years. They have control of congress and could have made some changes. Why didn't they? Because they all are getting big payouts from these companies, that's why! They are not fooling anyone.

    On the ways to fix the economy....well you can not tell a private company such as AIG how to run their company. And you definitely can't make them be transparent in what they are doing.

    Secondly....So I see this guy said we should set up an oversight COMMISSION to keep up with everything. UMMM...isn't that funny since Obama jumped on John McCain and said that commissions are useless! Well who looks like a fool now!?

    All in all what he suggests sounds good but getting it done will be another thing completely. These companies will be kicking and screaming all the way trying to stop the regulations. And I'm sure they'll be paying off people to stop it or to try to.


    September 18, 2008 at 8:53 am |