Stiglitz's Plan for Fighting the American and Global Financial Crisis of 2008
Stiglitz proposed the following plan in an article in Time dated October 27, 2008, pp. 27-28.
1. Recapitalize banks.
2. Stem the tide of foreclosures.
3. Pass a stimulus that works.
4. Restore confidence through regulatory reform.
5. Create an effective multilateral agency.
Stigilitz cautions the government not to bail out bondholders of banks. The losses of shareholders and bond holders need not be made good by the government. Government provides for additional capital and gets appropriate equity stake in banks. This equity may be sold by the government when things stabilize later on.
Similarly government can support house owners with mortgages. It may provide temporary support to them to tide over the difficulty but devise schemes in such a way that there is a penalty on the house owners for taking loans beyond their ability. Government may take equity in houses which may be sold later on either to the current owner or a to a new owner.
Stimulus packages are needed to reactivate the economy in general.
The failures of the system that caused the crisis need to be ascertained and new policy and regulation needs to be put in place.
As the crisis spread to Europe from USA, multilateral agency is to be created to understand global systemic risks.
The interesting idea, that emanates from Stiglitz's proposal is that all persons who made wrong decisions have to be allowed to incur losses due to their extra risk taking and government should not bail any one of them with tax payers' money.