Stiglitz: Paulson Is ‘Wrong,’ Current Economic Crisis ‘Is A Failure Of Regulation’

This week, Treasury Secretary Hank Paulson proposed a shake-up of financial regulations, a plan that had its “genesis in a yearlong effort to limit Washington’s role in the market.” The administration’s proposed new oversight, however, “would have a light touch, enabling the government to do little beyond collecting information — except in times of crisis,” the New York Times observed.

On Monday, Paulson stuck up for this hands-off regulatory approach:

I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil. … I am not suggesting that more regulation is the answer.

In contrast, yesterday on CNN, Nobel Prize winning economist Joseph Stiglitz sharply disagreed with Paulson, stating that the regulatory failures were indeed to blame for our current situation: “He [Paulson] is wrong, it is a failure of regulation.” Noting the recent Bear Stearns bailout, Stiglitz made an analogy concerning the need for more effective regulation:

[T]hat’s why you have regulations. You just don’t build better hospitals. You try to stop the diseases before they lead you to be in the hospital.

Watch it:

[flv http://video.thinkprogress.org/2008/04/stiglitzdobbs1.320.240.flv]

Paulson’s plan does, however, expand power of the Federal Reserve. Stiglitz argued this decision is highly ironic considering the Fed’s actions until now:

One of the ironies of this whole discussion is they want to give more power to the Fed, the Fed which flooded the market with liquidity, which did not bring regulations until after the crisis. It’s like closing the barn door after the horse is out. And now, to reward them for their excellent job, they want to give them more power.

In response to Paulson’s proposal, Senate Banking Committee Chairman Chris Dodd (D-CT) argued it reflected misplaced priorities, a “failure to utilize the regulatory tools” such as the Home Owners Protection Act 1994 that could have prevented the current housing crisis.

The Wonk Room has more on the the Bush administration’s and conservatives’ failed laissez faire approach to regulation.