Stiglitz calls for economic balance to be restored

Former World Bank chief economist says the US government has virtually no experience in handling financial institutions' toxic assets

Davos Nobel Prize-winning Columbia University economist Joseph Stiglitz was in Davos, where he spoke on the US stimulus package and the need to focus on investment. The important thing about Joe Stiglitz, former chief economist at the World Bank, is that he's one of those people who has been right. He was the one that people said was wrong when he said things were going to get worse. CNN's Richard Quest spoke to him on the sidelines of the World Economic Forum.

RICHARD QUEST: The question, of course, is whether the stimulus package being put forward by President Obama, coupled with taking alongside the TARP money, $350 billion (Dh1.28 trillion) of TARP money, whether that will do the trick.

JOSEPH STIGLITZ: No, I don't think anybody knew how absolutely reckless the banks were. But what that gambling, you might call it, has done is make the complexity of undoing the problems all the greater.

Are we moving to a situation where the people in all of these countries are being fooled by politicians? Politicians with - whether it be a stimulus package or a bailout, they are fooling them into believing that this can be dealt with without much pain?

Well, I think some politicians are trying to lower expectations. I know President Obama in the United States is trying to lower expectations. The problem to come to, for instance, the TARP, is that they keep holding out the promise of this kind of solution or that kind of solution. You know, sort of the aggregator bank, the "bad bank," you know, why do they think that the US government is going to do a particularly good job disposing of the toxic assets?

Now it is true that we turn to the public sector for garbage disposal. But, you know, its experience in disposing of garbage, toxic waste, is nil.

And so there's this sort of magic of this that we're going to take out these bad assets and by magic we are going to make our economy work. Not going to be so easy.

Has your confidence in the market as a mechanism for an economy, has it been shaken? Or have you merely been disgusted?

I think the only way you can run an economy is with markets and with government in a balance. We've lost that balance and when you do that, you get the kinds of results that we have. And I've been calling for restoring balance for a long time.

I think that is the lesson, not to abandon markets, but to (enforce) substantial reforms both in the way we run markets, but also in the way we regulate markets.