Nobel prize winning economist Joseph Stiglitz commenting on the way financial markets would work in a well-functioning market system as a opposed to…ummm, our system:
“The financial sector is supposed to allocate capital judiciously, making sure that it goes to areas where returns, when adjusted for risk, are highest… . Capital markets are also supposed to manage risk, transferring it from those parties less able to bear it to those that are more able to do so; distributing risk in this manner encourages entrepreneurship and stabilizes the economy… .
The financial system is supposed to do these things. But it is clear that America’s financial institutions have not managed risk; they have created it. The industry allocated hundreds of billions in bad loans to an inflated housing market, resulting in the greatest number of foreclosures since the Great Depression. With economic growth currently at a dreary 1 percent, there is already an immense gap between what we are now producing and what we could be producing if this crisis had not occurred—a cumulative loss I estimate will be in excess of $2 trillion.
If Daffy Duck had been put in charge of the most bureacratic agency in the federal government and told to “allocate capital as efficiently as possible”, it’s an almost certainty that Daffy would have outdone the Wall Street bankers.