Nobel Prize-Winning Economist Raises Concerns About Obama Mortgage Plan
Nobel Prize-winning economist, Joseph Stiglitz is convinced that the $75 billion mortgage relief program doesn’t do enough to help Americans who can’t afford to make their monthly payments.
“It doesn’t reduce principal, doesn’t make changes in bankruptcy law that would help people work out debts, and doesn’t change the incentive to simply stop making payments once a mortgage is greater than the value of a house”, he said yesterday.
Stiglitz said the Fed, while it’s done almost all it can to bring the country back from the worst recession since 1982, can’t 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.
“While the strategy might put a floor under housing prices, it won’t do anything to speed the recovery,” he said.
Even with rates low, banks may not lend because they remain wary of market or borrower risk, and in the current environment “there’s still a lot of risk.” That’s why Stiglitz believes that even with all of the programs the Fed and the administration have opened, lending is still very limited.
Stiglitz expressed a similar lack of confidence in the Obama Bank Rescue program this week. Stiglitz, 66, won the Nobel in 2001 for showing that markets are inefficient when all parties in a transaction don’t have equal access to critical information, which is most of the time.Â 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.
Stiglitz cites three main reasons he feels the Rescue is doomed:
- The Troubled Asset Relief Program isn’t extensive enough to recapitalize the banking system.
- The administration is ignoring this shortfall or is aware of it but doesn’t know how to address it.
- Even more troubling, many of Obama’s closest advisors have extremely close ties to Wall Street.
“America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street,” he said. “Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”
“All the ingredients they have so far are weak, and there are several missing ingredients,” said Stiglit. “The people who designed the plans are either in the pocket of the banks or they’re incompetent.”
Harsh words indeed. Stiglitz was also critical of Obama’s other economic rescue programs.
He called the $787 billion stimulus program necessary but “flawed” because too much spending comes after 2009, and because it devotes too much of the money to tax cuts “which aren’t likely to work very effectively.”
“It’s really a peculiar policy, I think,” he said.