Stiglitz States What Used to Be the Obvious

Corporate criminals should be in jail, says Nobel Prize winner and economist Joseph Stiglitz.  Well, yes.  I was in Houston during the fall of Enron, which pales in comparison to this thieving, and former pillars of the community were indicted.  I bet Ken Lay would turn in his grave if he had known that a few years later, he and Jeff Skilling and Andrew Fastow would have gotten off completely free.  Oh, well Angelo Mozilo had to pay a few bucks, about 1/8 of what he stole.  That’s a pretty good deal.

This article was in the Daily Finance here, with a video interview.  Excerpt:

“During a wide-ranging interview with DailyFinance at AOL headquarters in New York City this week, Stiglitz, who served as chief economist of the World Bank from 1997-2000 and is currently University Professor at Columbia University, explained how the availability of cheap money (thanks in large measure to former Fed Chairman Alan Greenspan), combined with outright mortgage fraud and deceptive and predatory lending practices put millions of people into homes they couldn’t afford and caused real estate prices to skyrocket. That created a bubble that would inevitably pop. (See video below, or read the full interview transcript.)

“Festering For Years”

“We have to understand that the problems have been festering for years, not just the last three years,” said Stiglitz. “In the years prior to the breaking of the bubble, the financial industry was engaged in predatory lending practices, deceptive practices. They were optimizing not on producing mortgages that were good for the American families but in maximizing fees.”

Meanwhile, stock-based compensation created further skewed incentives by encouraging executives to pursue short-term stock gains at the expense of long-term corporate sustainablity, Stiglitz said, and in some cases encouraged them to deceive their own shareholders.

Highly complex financial instruments and off-balance-sheet transactions allowed the bankers to keep much of their activity hidden from woefully understaffed regulators at the SEC and other supposed financial watchdog agencies. And if the regulators did catch some fraud, Stiglitz explained, the system of penalties generally meant a small fine relative to the full ill-gotten gains, often in the hundreds of millions of dollars.

“Still Home Sitting Pretty”

Legal penalties for financial fraud in the U.S. have become “just a cost of doing business,” Stiglitz said. “It’s like a parking fine. Sometimes you make a decision to park knowing that you might get a fine because going around the corner to the parking lot takes you too much time.”

“We fine them, and what is the big lesson?” said Stiglitz. “Behave badly, and the government might take 5% or 10% of what you got in your ill-gotten gains, but you’re still sitting home pretty with your several hundred million dollars that you have left over after paying fines that look very large by ordinary standards, but look small compared to the amount that you’ve been able to cash in.”

Taken together, Stigliz said, this system of widespread fraud, lax regulation and non-deterrent enforcement, created a system of skewed incentives that rewarded criminality, gambling and other bad behavior, and left American workers, investors and homeowners holding the bill.

Meanwhile, the astonishingly disproportionate influence of the big banks and corporations on the American political system has allowed powerful executives to exert their will on the U.S. government at the expense of the people, Stiglitz said.”

See full article from DailyFinance: http://srph.it/aRwI4I

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