Stiglitz Says Crisis Exposed ‘Major Flaws’ in Economics Ideas
By Scott Lanman
Jan. 2 (Bloomberg) -- Joseph Stiglitz, the Nobel Prize- winning economist and Columbia University professor, said economists are among those at fault for the financial crisis, which exposed “major flaws” in prevailing ideas.
The now-flawed premises include the ideas that economic participants behave rationally and that financial markets are competitive and efficient, Stiglitz said today in a slide presentation prepared for a speech today to the Allied Social Science Associations meeting in Atlanta. Instead, for instance, the housing bubble was fueled by the idea that prices would go up forever, Stiglitz said.
The bursting of the bubble resulted in the recession that began in December 2007 and is now the worst since the Great Depression, having claimed more than 7 million U.S. jobs. Homeowners, investors and “probably” financial executives showed “marked irrationalities” and may have “bought into their own false arguments,” Stiglitz said.
“Economists should be included in the list of those to ‘blame’ for the crisis,” Stiglitz said in the presentation, which Bloomberg News obtained via e-mail. There’s now a “window of opportunity” to build new theories “based on more plausible accounts of individual and firm behavior,” he said.
In one slide, Stiglitz repeated criticism of Alan Greenspan, the Federal Reserve chairman from 1987 to 2006, for recommending consumers take on variable-rate home loans. Greenspan responded to Stiglitz two years ago that he meant to suggest that a “narrow segment” of customers might want an alternative to long-term mortgages.
In the market for securities tied to mortgages, the products were so complex that investors couldn’t determine the quality of the underlying assets, “inducing large incentives for asset quality deterioration,” Stiglitz said. “Globalization had opened up a global marketplace for fools.”
Stiglitz, 66, a professor at Columbia University in New York and a White House economic adviser under President Bill Clinton, shared the Nobel Prize in 2001 with George Akerlof and Michael Spence for work on problems that arise in markets when parties don’t have equal access to information.
To contact the reporter on this story: Scott Lanman in Washington at firstname.lastname@example.org.