Social Democratic Principles: Towards a New Financial Architecture

Policy Study

09/10/2014

In this paper, J. Stiglitz, after having presented his views on the dysfunctions of the financial markets, details what should be the goals and the operative framework for a New Financial Architecture. After having stated that financial markets are “not an end in themselves” and that their monitoring should be understood as a “public good”, a “public responsibility”, J. Stiglitz proposes in order to align private rewards to social returns, to act through a regulation of the incentives at the financial level. Among others, it would seem useful to base bonuses “on performance over at least five years period”, to require “that mortgage originators retain at least a 20% equity share” and to implement a “Government rating agency”.  From a practical point of view, J. Stiglitz proposes first, to proscribe “variable rate mortgages in which payments can vary significantly”, second, to limit the “speed of expansion of assets” and, third, to prohibit the purchase or the production of derivatives and financial products by highly regulated entities “unless they have been approved for specific uses by financial products safety commission (FPSC)”. However, J. Stiglitz seems aware of the increasing facilities with which financial institutions can beat the game and suggests that it should exist a “sufficient authority to proscribe such behavior”. Finally, J. Stiglitz calls for more democracy in the monitoring of the economy by suggesting that “those who are affected by the failure of regulation should have a large voice in any regulatory structure”.

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