Stiglitz: Current bailout approach would help Wall Street, but not the real economy

Writing in the opinion section of the Guardian (UK), Nobel-winning economist Joseph Stiglitz says what a growing number of economists are saying: The Wall Street bailout plan that House leaders are working to retool and resurrect provides no meaningful prospect of the public’s getting its money back, and won’t fix the problem in financial markets. Stiglitz writes:

[T]he plan assumed that the fundamental problem was one of confidence. That is no doubt part of the problem; but the underlying problem is that financial markets made some very bad loans. There was a housing bubble, and loans were made on the basis of inflated prices.

That bubble has burst. House prices probably will fall further, so there will be more foreclosures, and no amount of talking up the market is going to change that. The bad loans, in turn, have created massive holes in banks’ balance sheets, which have to be repaired. Any government bail-out that pays fair value for these assets will do nothing to repair that hole. On the contrary, it would be like providing massive blood transfusions to a patient suffering from vast internal hemorrhaging.

Read the Stiglitz column.