Monday, May 10, 2010

Perhaps Joseph Stiglitz should return his Nobel Prize

Stiglitz correctly holds that whenever there is imperfect information or asymmetric information, in essence always, the reason the invisible hand seems to be invisible it is because it is not there. One of the problems for this is of course that the markets are not efficient information transmitters… because if they were “no one would have any incentive to gather information”.

Is this why he never spoke out when the regulators appointed the credit rating agencies as official information gatherers for the purpose of establishing the capital requirements of banks?

If so how intellectually stupid to think that giving so much power to some very few opinion givers would solve the lack of asymmetric information in the market and not just dangerously increase the size of the asymmetric information gaps? He should perhaps return his Nobel Prize!

Stigliz is now also telling us we should ask “what is the financial system supposed to do?” Why did he himself not ask that before? Did he not know that our current primary bank regulators, those holed up in the Basel Committee, do not utter a word on the purpose of our banks in the Basel II regulations approved by G10 in June 2004?

The regulators in Basel, with amazing hubris thinking they could control for risk, designed capital requirements for banks that while allowing for what sounds like a reasonable 12.5 to one leverage when lending to small businesses and entrepreneurs, those on whom we depend so much on for jobs, but cannot afford being rated by the raters; they permitted the banks to leverage 62.5 to one, five times more, when stocking on public debts like Greece’s, just because some human fallible credit rating agencies rated Greece as good? Did Stiglitz not know about this either? For someone who likes to talk so much about development, he should have.

PS.1. Stiglitz states “The financial sector paid good money to make sure the regulators weren’t doing what they were supposed to do!” If I was a member of the Basel Committee, which of course I am not, I would ask Mr. Stiglitz to clarify what he seems to be implying.

PS.2. In minute 55:50 you hear Stiglitz saying: “What rate of return do we need to get on our investments in order for the tax revenues that we get from the short run growth and from the long run growth lead to an actual reduction in the national debt in the long run?; and the answer is a very low return, only about 5 to 6 percent return on public investments will lead to a long lower long term national debt; and the evidence is that the returns from investments for instance in public technologies are much-much higher…. so we should encourage expenditure that yield returns.”

And when I hear that I shiver, because I know that he knows, this argument will support expenditure that will not yield returns… but which is ok with his agenda. Somewhere in there, Stiglitz refers to “when we hear those politicians talk” What a laugh!