Fed failed twice, says Nobel economist

NEW YORK, Sept. 17 (UPI) -- The financial crisis on Wall Street was aggravated by two federal policy mistakes, a Nobel laureate said.

First, the U.S. Federal Reserve kept interest rates low, creating a "flood of liquidity," Joseph Stiglitz, professor at Columbia University and 2001 Nobel Prize winner in Economics, wrote in an article for CNN Wednesday.

Second, "lax regulations" failed to hold back risks-taking, which was generously rewarded when executives made short-term gains for their companies, Stiglitz wrote.

The current housing bubble was built on new financial instruments that "hid the extent of systemic leverage and made the risks less transparent," he wrote.

"The coup d'grace," Stiglitz contends, "was the Iraq War, which contributed to soaring oil prices."

"Money that used to be spent on American goods now got diverted abroad," Stiglitz said.

Stiglitz called for executive bonus structure to be changed to reflect long-term gains and the creation of a "financial product safety commission."

"Consenting adults should be given great freedom to do whatever they want, but that does not mean they should gamble with other people's money," he wrote.