US Bailout Wont Work - Nobel Peace Prize Winner

Courtesy : Money control 

Joseph Stiglitz, a professor at the Columbia University and the 2001 Nobel Prize winner, said the US government’s bailout packages designed for financial institutions may not work. “It is a peculiarly-structured programme,” Stiglitz said, “The government puts in 92% of the money, the private sector walks away with 50% of the profits and the government absorbs almost all the losses. What kind of partnership is that?”

The Nobel Prize winner said the financial system in the US engaged in too much risk-taking. “If you are a bank too big to fail, you have a one-sided bet. If you win, you walk off with the profit. If you lose, you are too big to fail, so the government picks up the losses. It is a system built-in sense of excessive risk taking,” he said. “The banks did exactly what the economists forecasted they would, they had excessive risk-taking.”

Stiglitz said one of the reasons there is feeling the bailout packages won't work is so many people in the financial markets are afraid that once taxpayers realize how badly they have been treated, they will demand a way of getting some cash back. “While the programme is designed in a flawed way to give the private sector, hedge funds and other partners huge amounts of money, because everyone is afraid they won't be able to keep that, it will inhibit bidding for assets.”

The International Monetary Fund in its estimate, he said, had made it clear that the losses in the banking system were very deep and that the hole in the banking system even after the bailout programme would be huge. “We are only half way through putting in the needed money,” he said.