‘Stiglitz’s Switch in Time’

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Over at Cato’s blog, my colleague Mark Calabria calls out Nobel economics prize winner Joseph Stiglitz for ignoring his own little role in the economic downturn:

Speaking before a group of protesters in Zuccotti Park, Nobel economics prize winner Joseph Stiglitz urged on the crowd, telling them they are “right to be indignant.”  Professor Stiglitz goes on to explain, correctly in my view, that we have a financial system of socialized losses and privatized gains. 

What the good professor fails to mention is only a few years ago, for what I understand was a nice paycheck, he was denying this very fact.  In 2004, along with Jonathan and Peter Orszag, Professor Stiglitz wrote a paper for Fannie Mae in which he “estimated” that the “risk to the government from a potential default on GSE debt is effectively zero.”  The paper goes on to argue “that the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is just $2 million.”  Now I understand his Nobel is in economics, not math, but $2 million sounds nowhere near the actual cost so far of $160 billion.

Certainly there was a time where some could be forgiven for not really understanding the nature of Fannie and Freddie, but this was published after Freddie’s accounting scandals came to light and while Fannie itself was being investigated.

So yes, you do have a right to be indignant.  Especially at those “academics” who sold their work to the highest bidder defending the system and now pretend to be shocked at how everything turned out.

I noted the Stiglitz paper in a Cato paper on the Department of Housing and Urban Development’s scandalous history. One of Stiglitz’s co-authors was President Obama’s first budget director, Peter Orszag, who was then at the Brooking Institution. As I went on to explain, a “channel of influence in housing policymaking has been the revolving door between government offices and the private sector.” That’s something that the Occupy Wall Street protestors should keep in mind: the problem isn’t capitalism – it’s the “crony capitalism” that’s been fostered by an unhealthy relationship between government and business. 

See this Cato essay for more on the federal government’s involvement in housing finance and how it helped spark the financial crisis we’re still dealing with.