Stiglitz on the causes of the financial crisis and how to prevent the next one
Saturday, September 20, 2008 at 09:48AM
Skeptic in Financial innovation, Sub-prime Mortgage Melt-down

Nobel laureate Joseph Stiglitz succinctly addresses the causes of the financial crisis and makes recommendations for preventing a recurrence here. He does not propose solutions to the current mess. 

Stiglitz says the Fed created a "flood of liquidity" and failed in its duty to impose and enforce prudential regulations on those involved in mortgage lending. This led to excessive leverage and a "pyramid scheme." The so-called "innovations" implemented by the financial industry were essentially just obfuscation of leverage and risk (as I had written here). He follows with additional criticisms of the financial industry and recommends 6 reforms:

1. Realign incentives in executive compensation systems at financial institutions.

2. Create a "financial product safety commission."

3. Create a "financial systems stability commission."

4. Impose other "speed bump" regulations to prevent too-rapid growth of borrowing.

5. Adopt better consumer lending laws, including laws that prevent predatory lending.

6. Enact better competition laws.

Thanks to Christine for the heads up.

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