Stiglitz Says Bank Rescue Doomed by Obama Administration Wall Street Ties http://www.bloomberg.com/apps/news?pid=20601087&sid=ahnPchOxZMh8&refer=home By Michael McKee and Matthew Benjamin April 16 (Bloomberg) -- The Obama administrationâs plan to fix the U.S. banking system is destined to fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said. âAll the ingredients they have so far are weak, and there are several missing ingredients,â Stiglitz said in an interview. The people who designed the plans are âeither in the pocket of the banks or theyâre incompetent.â The Troubled Asset Relief Program, or TARP, isnât large enough to recapitalize the banking system, and the administration hasnât been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obamaâs advisers have close ties to Wall Street. âWe donât have enough money, they donât want to go back to Congress, and they donât want to do it in an open way and they donât want to get controlâ of the banks, a set of constraints that will guarantee failure, Stiglitz said. The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. âThe bank restructuring has been an absolute mess.â Rather than continually buying small stakes in banks, weaker banks should be put through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said. Nobel Prize Stiglitz, 66, won the Nobel in 2001 for showing that markets are inefficient when all parties in a transaction donât have equal access to critical information, which is most of the time. His work is cited in more economic papers than that of any of his peers, according to a February ranking by Research Papers in Economics, an international database. The Public-Private Investment Program, PPIP, designed to buy bad assets from banks, âis a really bad program,â Stiglitz said. It wonât accomplish the administrationâs goal of establishing a price for illiquid assets clogging banksâ balance sheets, and instead will enrich investors while sticking taxpayers with huge losses. âYouâre really bailing out the shareholders and the bondholders,â he said. âSome of the people likely to be involved in this, like Pimco, are big bondholders,â he said, referring to Pacific Investment Management Co., a bond investment firm in Newport Beach, California. Bigger Losses Stiglitz said taxpayer losses are likely to be much larger than bank profits from the PPIP program even though Federal Deposit Insurance Corp. Chairman Sheila Bair has said the agency expects no losses. âThe statement from Sheila Bair that thereâs no risk is absurd,â he said, because losses from the PPIP will be borne by the FDIC, which is funded by member banks. âWeâre going to be asking all the banks, including presumably some healthy banks, to pay for the losses of the bad banks,â Stiglitz said. âItâs a real redistribution and a tax on all American savers.â Stiglitz was also concerned about the links between White House advisers and Wall Street. Hedge fund D.E. Shaw & Co. paid National Economic Council Director Lawrence Summers, a managing director of the firm, more than $5 million in salary and other compensation in the 16 months before he joined the administration. Treasury Secretary Timothy Geithner was president of the New York Federal Reserve Bank. âRevolving Doorâ âAmerica has had a revolving door. People go from Wall Street to Treasury and back to Wall Street,â he said. âEven if there is no quid pro quo, that is not the issue. The issue is the mindset.â Stiglitz was head of the White Houseâs Council of Economic Advisers under President Bill Clinton before serving from 1997 to 2000 as chief economist at the World Bank. He resigned from that post in 2000 after repeatedly clashing with the White House over economic policies it supported at the International Monetary Fund. He is now a professor at Columbia University. Stiglitz was also critical of Obamaâs other economic rescue programs. He called the $787 billion stimulus program necessary but âflawedâ because too much spending comes after 2009, and because it devotes too much of the money to tax cuts âwhich arenât likely to work very effectively.â âItâs really a peculiar policy, I think,â he said. Plan Deficient The $75 billion mortgage relief program, meanwhile, doesnât do enough to help Americans who canât afford to make their monthly payments, he said. It doesnât reduce principal, doesnât make changes in bankruptcy law that would help people work out debts, and doesnât change the incentive to simply stop making payments once a mortgage is greater than the value of a house. Stiglitz said the Fed, while itâs done almost all it can to bring the country back from the worst recession since 1982, canât revive the economy on its own. Relying on low interest rates to help put a floor under housing prices is a variation on the policies that created the housing bubble in the first place, Stiglitz said. âThis is a strategy trying to recreate that bubble,â he said. âThatâs not likely to provide a long run solution. Itâs a solution that says letâs kick the can down the road a little bit.â While the strategy might put a floor under housing prices, it wonât do anything to speed the recovery, he said. âItâs a recipe for Japanese-style malaise.â To contact the reporter on this story: Michael McKee in New York at mmckee@bloomberg.net; Matthew Benjamin in Washington at Mbenjamin2@bloomberg.net
I think Stiglitz nails it. Kudos to him. He's got credibility in spades. Obama had better wake up and clean out his cabinet.
He should, but it wont ever happen. He doesnt want to f up his $10-$20million per year pay day when he leaves the WH...and he knows he pays it.