Tuesday, January 19, 2010

Layers and Layers of Moral Hazard

Joseph Stiglitz is hardly an economist that shies away from recommending government intervention in the economy. That's why it is almost amusing to see him point out the moral hazards upon moral hazards that are currently built into the system because of government interventions. He accurately told CNBC today that the U.S. doesn't have capitalism anymore. Here's CNBC with the details:
Layers of money managers that don't bear the brunt of losses but walk away with big payouts when things go well have turned the US economy to a type of "ersatz capitalism," Joseph Stiglitz, Columbia University professor and Nobel laureate, told CNBC Tuesday.

"An awful lot of people are not managing their own money," Stiglitz said. "In old-style 19th Century capitalism, I owned my company, I made a mistake, I bore the consequences."

"Today, (at) most of the big companies you have managers who, when things go well, walk off with a lot of money. When things go bad the shareholders bear the costs," he said.

Even worse, those giving the money to the companies are entities like pension funds that are managing money on behalf of other people, so there are "layers and layers of agency costs," Stiglitz said.

It's a system where "you socialize the losses and privatize the gains," which is not capitalism, he said.

There's "moral hazard everywhere," he added
Of course, he fails to mention that it is the government that socializes the losses and it is tax laws that have a lot to do with the structure of pension funds that keep them at a significant distance from the supposed beneficiaries.

Since he completely misses how government regulations to date and government interventions in the economy have caused the moral hazards he naturally calls for more government regulations and interventions.

Hey, give the man a Nobel Prize. Oh, he already has one.

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