Nobel Economist Predicts Further Collapse

by Brian Johnson on February 18, 2010

Nobel Prize-winning economist and Columbia Business School professor, Joseph Stiglitz argues in this interview that we are headed for another collapse.  His arguments are sound and should be listened to.

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If you do not feel like watching the full video, we’ve broken down the argument he offers during this interview into a few key bullet points:

  • Stiglitz’s first point is that almost nothing has been done since the last disaster to reform the way Wall Street does business.  The practices that led to the recession are still allowed and so we can expect another disaster.
  • We still have ‘too big to fail’ financial institutions which, because we will bail them out, are like one-sided bets:  if they make a risky investment and it pays off, they win, but if they lose, then it’s the taxpayers who lose because we’ll bail them out.  Moreover, these ‘too big to fail’ banks are now even worse competition for smaller banks since they get bailed out when they take bad risks, whereas a smaller bank at risk of failing cannot expect a government hand out.
  • Our policy towards ‘too big to fail’ banks has forced us to slip into a moral hazard:  we’ll bale out everyone involved no matter what their responsibility for the problem.  So, the people running these institutions know that they can engage in risky behavior without having to take the repercussions personally.
  • This most recent collapse wasn’t out of the ordinary:  it was not only predictable but it was predicted.  The banking industry would have taxpayers believe that the current recession is a “thousand year storm” but, in fact, it was the inevitable repercussion of bad banking practices and deregulation that had been causing damage to the global economic system for decades.
  • The devastation was caused by our lax regulation which encouraged banks to engage in risky behavior.  Our regulation is still lax.
  • In the short run, Stiglitz expects problems because the government hasn’t dealt with the last crisis effectively: we’re still seeing real estate problems and high risk speculation.
  • In the longer term, in 3-7 years time, Stiglitz predicts that the incentives still  offered for excessive risk taking due to lax regulation will cause another collapse.
  • What we need for effective reform is more transparency, better incentives for proper behavior, and the invocation of the Volker Rule to prevent conflicts of interest—no speculative trading by depository institutions.
  • We also need to restrict high leverage trading (Credit Default Swaps).

Discussion

andrewwalker
This is a wonderful opinion. The things mentioned are Great and needs to be appreciated by everyone.
Stocks and Shares ISA
May 23 at 16:21 pm

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