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Joe Stiglitz on the Crisis


So, Joe Stiglitz is weighing in on the crisis with an article with Vanity Fair. His claims? Five major mistakes were made.

#1: Firing the regulator inflation-fighter Paul Volcker in favor of free-marketeer Alan Greenspan
#2: Gramm-Leach-Bliley AKA the “Financial Services Modernization” Act
#3: “Applying the Leeches” – by which he means poorly planned, “ineffective” tax cuts/”stimulus”, that “made” the Fed pump money into the economy to stimulate it.
#4: “Faking the Numbers” – misleading accounting + dishonest ratings
#5: “Letting it Bleed” – bailouts instead of fixing the real problem

Simple responses?

#1: Doesn’t matter who is in charge, the nature of the fractional reserve banking system paired with fiat currency would have pushed us this direction.
#2: I’m pretty sure that Robert Ekelund and Mark Thornton have said the same sort of thing, but with an actual reason: our banking system is filled with moral hazards (fiat money, FDIC, fractional reserves, the Fed), so this “deregulation” amounted to corporate welfare.
#3: “Yes, but…” if the Fed did not exist, then we would have avoided the current crisis anyway.
#4: Agreed. Fraud is bad. Even anarchocapitalists don’t approve of fraud.
#5: Also agreed. Bailouts will make the problem worse, and don’t fix the real problem. The real, root problem isn’t a lack of regulation; it’s the government-sponsored system of moral hazards that eliminates every natural check on irresponsible lending and makes regulation the only way to manage lending risk. Eliminate the moral hazards, and the regulations stop being “necessary”.

So close, and yet, so, so far.

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