April 17 (Bloomberg) — The Obama administration’s bank-
rescue efforts will probably fail because the programs have been
designed to help Wall Street rather than create a viable
financial system, Nobel Prize-winning economist Joseph Stiglitz
said.

“All the ingredients they have so far are weak, and there
are several missing ingredients,” Stiglitz said in an interview
yesterday. The people who designed the plans are “either in the
pocket of the banks or they’re incompetent.”

The Troubled Asset Relief Program, or TARP, isn’t large
enough to recapitalize the banking system, and the
administration hasn’t been direct in addressing that shortfall,
he said. Stiglitz said there are conflicts of interest at the
White House because some of Obama’s advisers have close ties to
Wall Street.

“We don’t have enough money, they don’t want to go back to
Congress, and they don’t want to do it in an open way and they
don’t want to get control” of the banks, a set of constraints
that will guarantee failure, Stiglitz said.

The return to taxpayers from the TARP is as low as 25 cents
on the dollar, he said. “The bank restructuring has been an
absolute mess.”

Rather than continually buying small stakes in banks,
weaker banks should be put through a receivership where the
shareholders of the banks are wiped out and the bondholders
become the shareholders, using taxpayer money to keep the
institutions functioning, he said.

Nobel Prize

Stiglitz, 66, won the Nobel in 2001 for showing that
markets are inefficient when all parties in a transaction don’t
have equal access to critical information, which is most of the
time. His work is cited in more economic papers than that of any
of his peers, according to a February ranking by Research Papers
in Economics, an international database.

The Public-Private Investment Program, PPIP, designed to
buy bad assets from banks, “is a really bad program,” Stiglitz
said. It won’t accomplish the administration’s goal of
establishing a price for illiquid assets clogging banks’ balance
sheets, and instead will enrich investors while sticking
taxpayers with huge losses.

“You’re really bailing out the shareholders and the
bondholders,” he said. “Some of the people likely to be
involved in this, like Pimco, are big bondholders,” he said,
referring to Pacific Investment Management Co., a bond
investment firm in Newport Beach, California.

Bigger Losses

Stiglitz said taxpayer losses are likely to be much larger
than bank profits from the PPIP program even though Federal
Deposit Insurance Corp. Chairman Sheila Bair has said the agency
expects no losses.

“The statement from Sheila Bair that there’s no risk is
absurd,” he said, because losses from the PPIP will be borne by
the FDIC, which is funded by member banks.

“We’re going to be asking all the banks, including
presumably some healthy banks, to pay for the losses of the bad
banks,” Stiglitz said. “It’s a real redistribution and a tax
on all American savers.”

Stiglitz was also concerned about the links between White
House advisers and Wall Street. Hedge fund D.E. Shaw & Co. paid
National Economic Council Director Lawrence Summers, a managing
director of the firm, more than $5 million in salary and other
compensation in the 16 months before he joined the
administration. Treasury Secretary Timothy Geithner was
president of the New York Federal Reserve Bank.

‘Revolving Door’

“America has had a revolving door. People go from Wall
Street to Treasury and back to Wall Street,” he said. “Even if
there is no quid pro quo, that is not the issue. The issue is
the mindset.”

Stiglitz was head of the White House’s Council of Economic
Advisers under President Bill Clinton before serving from 1997
to 2000 as chief economist at the World Bank. He resigned from
that post in 2000 after repeatedly clashing with the White House
over economic policies it supported at the International
Monetary Fund. He is now a professor at Columbia University.

Stiglitz was also critical of Obama’s other economic rescue
programs.

He called the $787 billion stimulus program necessary but
“flawed” because too much spending comes after 2009, and
because it devotes too much of the money to tax cuts “which
aren’t likely to work very effectively.”

“It’s really a peculiar policy, I think,” he said.

Plan Deficient

The $75 billion mortgage relief program, meanwhile, doesn’t
do enough to help Americans who can’t afford to make their
monthly payments, he said. It doesn’t reduce principal, doesn’t
make changes in bankruptcy law that would help people work out
debts, and doesn’t change the incentive to simply stop making
payments once a mortgage is greater than the value of a house.

Stiglitz said the Fed, while it’s done almost all it can to
bring the country back from the worst recession since 1982,
can’t revive the economy on its own.

Relying on low interest rates to help put a floor under
housing prices is a variation on the policies that created the
housing bubble in the first place, Stiglitz said.

“This is a strategy trying to recreate that bubble,” he
said. “That’s not likely to provide a long run solution. It’s a
solution that says let’s kick the can down the road a little
bit.”

While the strategy might put a floor under housing prices,
it won’t do anything to speed the recovery, he said. “It’s a
recipe for Japanese-style malaise.”