Joseph Stiglitz: wrong on housing and wrong on China
In the case of housing finance, writing with colleagues in 2002 Stiglitz suggested that the probability of a shock as severe as that anticipated in the new risk-based capital standards for Fannie Mae and Freddie Mac was less than one in five hundred thousand and possibly less than one in three million . And that, given the extremely small probability of a default by these institutions, the expected monetary costs from exposure to their insolvency would be ‘relatively small’. By any stretch of the imagination this must count as a serious error of judgement – though of course Stiglitz was not alone in failing to perceive the seeds of the housing meltdown that arrived just 5 years later. One would have thought though, that in light of such error Stiglitz might have cause to question his frequent assertions that the likelihood of future financial crises would be lessened if only there could be more powers for regulators informed by his particular vision of an activist state…
Read the full article on the Pileus blog.
Mark Pennington is the author of Robust Political Economy: Classical Liberalism and the Future of Public Policy.