Stiglitz: Obama's Falling Down on the Job

Joseph Stiglitz recently published an article in the New York Daily News, giving some credit to the President's handling of the economy, but remaining highly critical.

He cites three main failings:

1. "They underestimated the severity of the downturn. As a result, the stimulus program was too small"
   
2. "The mortgage restructuring program was not well-designed: It allowed no write-down of principal, so it did little about the one quarter of mortgages where homeowners owe more than the value of their house"
3. "The bank bailouts didn't do what they were supposed to: restart lending... while 140 smaller banks were allowed to fail, billions were poured into the big banks, who poured much of the money out in dividends and bonuses."

What we talked about in class today was very relevant to this and other posts I have made the past few days. The government continues to go through the subsidiary of the private financial institutions to reinvest in the economy, yet the these institutions have yet to do so. Meanwhile, firms are unable to hire new employees, who are then unable to purchase goods, or even pay off the debts they owe. To some extent, channeling government money to direct loans to reinvigorate businesses looking to expand the scope of their enterprise (specifically: jobs) would undercut the bailout money already provided to the banks with the same goal. However, as we have just given the bailout money with little stipulation as to its use, the banks don't seem about to act anyway.

I believe that most of you (liberal, conservative, and libertarian alike) would agree that continued government grants to the financial giants is ultimately self-destructive, given our spiraling national debt and the irresponsibility of the private institutions. In my last post, Evan argued for government investment in small banks, given "careful auditing" (which I interpret as ensuring it not go to massive bonuses or executive comfort), would let the profit motive will drive the most efficient use of money in the quickest amount of time. Though I moderately support the expansion of the SBA, at least in conjunction with support to small banks, I have significant doubts that small banks would act much differently lending-wise than the bigger, more secure banks.

What does the expanded circular flow model mean in regard to the recession and the stimulus? If we rely on the financial institutions to be the kick start to the economy, and they refrain from doing so, where do we go next?