Stiglitz: "Moral Hazard Everywhere"

Written By Brian Hicks

Posted January 19, 2010




This seems pretty obvious to me. But it never hurts to hear it again…

From CNBC entitled: U.S. Does Not Have Capitalism Now: Stiglitz

“Layers of money managers that don’t bear the brunt of losses but walk away with big payouts when things go well have turned the US economy to a type of “ersatz capitalism,” Joseph Stiglitz, Columbia University professor and Nobel laureate, told CNBC Tuesday.

“An awful lot of people are not managing their own money,” Stiglitz said. “In old-style 19th Century capitalism, I owned my company, I made a mistake, I bore the consequences.”

“Today, (at) most of the big companies you have managers who, when things go well, walk off with a lot of money. When things go bad the shareholders bear the costs,” he said.

Even worse, those giving the money to the companies are entities like pension funds that are managing money on behalf of other people, so there are “layers and layers of agency costs,” Stiglitz said.

It’s a system where “you socialize the losses and privatize the gains,” which is not capitalism, he said.

There’s “moral hazard everywhere,” he added.

For 50 years after the depression there was lots of regulation and not one financial crisis and in the last 30 years there have been 100 financial crises, he said.

As for the argument that regulation stifles innovation, Stiglitz cited former Federal Reserve Chairman Paul Volcker, who said: “it’s hard to find any evidence from anybody who’s not in the industry that can show any clear link between the so-called financial innovations and increased productivity in our economy.”

Instead of creating products to manage risks, the financial markets created new products that increased risks, Stiglitz added.”


Too big to fail is too dangerous to allow.

It’s just that simple. And one of these days that lesson will finally sink in.

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