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Stiglitz Faults Fed, Banks For Crisis

Former World Bank chief blames free market adherents for recession

By Naveen N. Srivatsa, Crimson Staff Writer

Columbia economics professor and Nobel laureate Joseph E. Stiglitz chastised regulators, bankers, and economists for their role in the ongoing financial crisis before a full audience at Brattle Theatre last night.

Stiglitz, a former World Bank Chief Economist who is known for his critical views of modern globalization, lambasted “market fundamentalists” for their devout adherence to capitalism, which resulted in loosened regulations and increased risk-taking.

“Obviously, the financial system undertook excessive risk,” he said. “The banks didn’t do what they were supposed to do, which was to allocate capital, manage risk, run a payments mechanism, and do it all at low transaction costs.”

Stiglitz participated in a question-and-answer session with J. Cullen Murphy Jr., the editor-at-large at Vanity Fair, as part of a book tour promoting his recent release on the financial crisis titled “Freefall: America, Free Markets, and the Sinking of the World Economy.”

Stiglitz also criticized the Obama administration and the Federal Reserve for lending money to banks without a vision of what a stable financial system should look like or an acknowledgement of the danger of risk-encouraging incentives.

Nor did he spare economists, whom he said have exhibited a sort of cognitive dissonance in using old data to analyze new investment vehicles.

“The economics profession has to recognize that some of the models that have been very dominant in thinking are very badly flawed,” Stiglitz said. “Markets are not as efficient, people are not as rational as we assumed.”

“It’s not just that there was a bubble,” he added. “I think we all recognize that there was a bubble, but if you look at the kinds of mistakes that they made—the kinds of intellectual incoherence—it is really mind-boggling.”

After speaking and taking questions from the audience, Stiglitz signed copies of “Freefall” at the event, hosted by the Harvard Book Store and the Hauser Center for Nonprofit Organizations.

Stiglitz came to Cambridge after stopping in New York and speaking at the Smithsonian Institute and the World Bank in Washington, D.C., according to Rachel Salzman, a publicist for W.W. Norton, Stiglitz’s publisher.

Harvard Book Store marketing manager Heather L. Gain, who introduced Stiglitz and Murphy at the event, said she was pleased with the turnout.

“Despite the otherwise apocalyptic weather, I thought it went great,” she said.

Audience member Ataveyra Medina said she appreciated the sincerity of Stiglitz’s message.

“I really admire his work. I thought he was very frank,” she said.

—Staff writer Naveen N. Srivatsa can be reached at srivatsa@fas.harvard.edu.

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