How were the incentives around compensation motivating [corporate] executives to act in a way that was contrary to their shareholders’ interests…
Stiglitz: Let me give you two examples. They got more pay when they got stock options. When the value of the stock goes up, they get the upside. But when it goes down, they don’t have to share the losses. When you have a system like, you have an incentive to gamble because you get the upside, but somebody else bears the losses. So that’s an example of incomplete sharing inducing excessive [risk-taking].
… what is the big lesson? Behave badly, and the government might take 5% or 10% of what you got in your ill-gotten gains, but you’re still sitting home pretty with your several hundred million dollars that you have left over after paying fines that look very large by ordinary standards but look small compared to the amount that you’ve been able to cash in… The fine is just a cost of doing business. It’s like a parking fine. Sometimes you make a decision to park knowing that you might get a fine because going around the corner to the parking lot takes you too much time.
… How did we get to where we are? It’s clearly the influence of campaign contributions and lobbyists.
… Let me just tell you how bad it is. I don’t think Americans understand how bad it is. It becomes really very difficult for individuals to discharge their debt. The basic principle in the past in America was people should have the right for a fresh start. People make mistakes. Especially when they’re preyed upon. And so you should be able to start afresh again. Get a clean slate. Pay what you can and start again. Now if you do it over and over again that’s a different thing. But at least when there are these lenders preying on you should be able to get a fresh start.
… one of the ways to deal with this foreclosure problem, the fact that one out of four Americans who have a mortgage are underwater: They owe more money on their home than the value of their home. Their home used to be what they used as the reserve for paying their kids college education, for their retirement. Now it’s a liability, not an asset.
So what I’ve argued is, we have these laws called Chapter 11 to give a fresh start to corporations. We say it’s very important to be able to do this quickly, we want to keep jobs, we want to keep the corporation going as an ongoing enterprise.
Families are as important as corporations. Keeping kids in school, not forcing them out of their home, keeping the community together, is certainly as important as keeping a corporation alive. So what I’ve called for is a homeowner’s Chapter 11.
It sounds like that would be a reasonable and actually quite popular plan. Do you think there’s any chance that would be enacted? Not as long as our banks have the kind of political influence they have today.
… The result of this is, as long as we keep up this strategy, it’s going to be a long time before the economy recovers
Read the entire article –> Joseph Stiglitz Interview Transcript, Oct. 20, 2010 – DailyFinance.