Bankrupt Banks & Decision-Makers in Denial

A Bank Bailout That Works

By Joseph E. Stiglitz

This article appeared in the March 23, 2009 edition of The Nation.

March 4, 2009

...the experience in other countries suggests that when financial markets run the show, the costs can be enormous. Countries like Argentina, Chile and Indonesia spent 40 percent or more of their GDP to bail out their banks. For the United States, the worry is that the $700 billion appropriated for the bank bailout may turn out to be just a small down payment....

There is a basic principle in environmental economics called "the polluter pays": polluters must pay for the cost of cleaning up their pollution. American banks have polluted the global economy with toxic waste; it is a matter of equity and efficiency that they must be forced, now or later, to pay the price of cleaning it up. As long as the banking sector feels that it will be bailed out of disasters--even ones it created--we will continue to have a moral hazard....

The plan needs to be transparent, cost the taxpayer as little as possible and focus on getting the banks to start lending again to sectors that create jobs.

Stiglitz goes on to point out that the U.S. already has the basic law in place: it's called bankruptcy. What an ironically appropriate word.