The current financial crisis is the worst the world has seen since the Great Depression of the 1930s and the US Federal Reserve move to cut interest rates will not make much difference, the Nobel Prize winning economist Joseph Stiglitz said on Wednesday. ( dpa )
"It will have some impact - it will do a little bit to stem the blood - but it's not addressing the fundamental problems underlying the collapse of the financial sector," he told Radio New Zealand.
Stiglitz, who won the Nobel Prize in economics in 2001, is a former chief of the World Bank and chaired former US president Bill Clinton's council of economic advisers. He is in New Zealand on a speaking tour.
He said the Federal Reserve's move to cut its funds rate by three- quarters of a percentage point was "just trying to ease the economy down rather than try to address the underlying problems."
Stiglitz said the main problem was the fact that an estimated 2 million Americans were going to lose their homes because they could not repay mortgages which exceed the value of their properties as house prices fell dramatically.
"As people walk away from their mortgages there will be more and more defaults - that undermines the whole financial system," he said.
Stiglitz said the Bush administration was bailing out banks, but accused it of refusing to do anything to help poor people stay in their homes which would stabilise the housing market.
"It's very easy to do something about it," he said, suggesting the administration could give assistance to write down mortgages to about 90 per cent of the value of a house which would enable people to stay in their properties.
However, the Bush administration has unveiled plans designed to help homeowners in danger of losing their homes by allowing holders of sub-prime mortgages to borrowers with poor credit to more easily apply for refinancing. The government will also send out tax rebate cheques in May.
Stiglitz said it was ironic that former Federal Reserve head Alan Greenspan had said it was the world's worst economic problem in the last 50 years, adding, "He is the source of much of the problem."
He said mismanagement by the Federal Reserve over the last seven years was one of the major factors underlying the current problem.
"They had the regulatory authority to prevent some of these bad practices that we are now paying for and he chose not to do it."
Stiglitz said the reason related in part to the war in Iraq and the very negative effect on the economy.
"They didn't want Americans to know exactly how bad the war was for the economy so they flooded it with liquidity, they looked the other way with regulations and they deliberately, I think, postponed the problem into the future and now we're paying the price."