Stiglitz: Not Just a Globalization Expert

I have tended to trust the Obama administration when it comes to plans to fix the financial crisis. It has been hard for me to evaluate the crisis since I do not fully understand Wall Street. I assume many of our politicians are having the same problem. Fortunately though, economists like Paul Krugman and Joseph Stiglitz are providing thoughtful critiques from a liberal perspective. In fact, Joseph Stiglitz's column in the NY Times may have convinced me that the Obama administration's most recent plan for the banks is a bad idea.

The plan will allow investors to buy up troubled assets with most of the money backed by the government. Here is Stiglitz's critique in his own words:

Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.

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So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.

My first reaction to my lack of understanding was to blame myself instead of the industry. But that was wrong; it is a major problem when the public cannot fully understand how an industry works and worse, how a solution is going to work. Without public understanding, we cannot have good policies that prevent further meltdowns. We need plans that make sense, and we need to make sure that in the future we can understand what Wall Street is doing.