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Realign the interests of Wall Street

By Joseph E. Stiglitz

From the seventeenth-century tulip mania to this century’s housing bubble, economies have been susceptible to the quest for the easy buck. Clever people will invariably circumvent regulations and accounting standards; they will seize opportunities to prey upon the poor and the ill-informed, to profit by selling the notion of the free lunch. By now most people are aware that over the past five years the financial sector has made bad loans and extremely risky bets, that defaults on the loans and record losses on the bets have seriously damaged the nation’s (and the world’s) economy. The downturn is likely to be so severe partly because we have succumbed to the opinion that markets work best by themselves, unfettered by government regulations. But the people making this argument are the ones who have been served well by it. We can do far more to protect against self-interest. In particular, we need to improve the incentives that drive those in the finance industry, so that their interests align with those of the society and economy they are meant to serve.

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SEE ALSO: Capitalism; Executives; Financial crises; Financial services industry; Foreclosure; Housing; Incentives in industry; Mortgage loans; Risk management; Stock options

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