Securitization was based on the premise that a “fool was born every minute.” - Joseph Stiglitz in congressional testimony, Financial Regulation, October 21, 2008.

Even Adam Smith recognized that unregulated markets will try to restrict competition, and
without strong competition markets will not be efficient. More recent research has shown that
markets often fail to produce efficient outcomes (let alone fair or socially just outcomes) when
information is imperfect or asymmetric—but information imperfections and asymmetries are at
the center of financial markets. That is what they are about. Our financial markets have even
worked hard to exacerbate these problems; as we have noted, they created non-transparent
products that were so complex that not even those who created them fully understood the risks to
which they gave rise.

And we should be clear—this non-transparency is a key part of the credit crisis that we have
experienced over recent weeks

more stiglitz notes on actual recommendations:

1. Derivatives and similar financial products should neither be purchased nor produced by highly
regulated financial entities, unless they have been approved for specific uses by a financial
products safety commission (FPSC, discussed below) and unless their use conforms to the
guidelines established by the FPSC

2. keep mark-to-market

3. disclosure of conflicts of interest

4. regulating incentives of managers, executives

5. mortgage originators have a 20% equity share

6. establish a government rating agency and also regulate the private ratings agencies

7. reinstate glass-steagall

8. stop exploitative or usary practices, i.e. payday loans, high credit card interest rates, renta furniture, etc.

9.

The Fed is too closely connected with financial markets to be the sole regulator.

Part of a new regulatory structure for the twenty first century should be a Financial Products
Safety Commission. This would assess the risks of particular products and determine their
suitability for particular users. Many of these products were allegedly designed for managing
particular risks, but the people buying those products did not face the risks for which they were
designed. They thus increased the overall risks which they faced. There should be a presumption
that financial markets work fairly well, and as a result there are no free lunches to be had.
Financial innovations that are defended as reducing transactions costs, but instead lead to
increased fees for financial institutions, should be suspect. The Financial Products Safety
Commission would also look at the pricing of these products. Many new financial products
(derivatives) were sold as lowering transactions costs and providing new risk arbitrage
opportunities, but pricing was based on information provided by existing assets, and they
succeeded in generating huge fees

Wall Street has polluted our economy
with toxic mortgages. It should now pay for the cleanup