Joseph Stiglitz Critiques Post-2008 Financial Policy and Suggests Reform

Drawing on the United Nations’ report World Economic Situation and Prospects 2016, former World Bank chief economist and senior vice-president Joseph E. Stiglitz, now  a professor at Columbia University, writes in The Guardian that “dominant [financial] policies during the post-crisis period . . . have tended to make matters worse.”

He observes that “in the US quantitative easing did not boost consumption and investment,” and suggests the failure is partly due to “perverse incentives.” Stiglitz argues that, overall, QE and ultra-low interest rates “stimulated sharp increases in leverage, market capitalization, and financial-sector profitability” rather than helping the real economy. Stated simply, banks will “choose riskless profit or even financial speculation over lending that would support the broader objective of economic growth.” With regard to developing countries and emerging markets, Stiglitz maintains that “neither monetary policy nor the financial sector is doing what it is supposed to do,” noting that “this year, developing countries, taken together, are expected to record their first net capital outflow . . . since 2006.” Asserting that “the flood of liquidity has disproportionately gone towards creating financial wealth and inflating asset bubbles, rather than strengthening the real economy,” Stiglitz says, “the risk of another financial crisis cannot be ignored.”

Drawing on World Bank and International Monetary Fund policies regarding lending cheap money to developing countries, he maintains that “QE should have been accompanied . . . by specific lending targets for banks” and “the Fed should have been penalizing banks for holding excess reserves” (rather than paying interest on them). Going forward, Stiglitz calls for “re-writing the rules of the market economy to ensure greater equality, more long-term thinking, and reining in the financial market.” He urges “large increases in public investment in infrastructures, education, and technology,” to be financed by “environmental taxes, including carbon taxes, and taxes on the monopoly and other rents that have become pervasive in the market economy.”