President-Elect Obama has done a good job in assembling his “economic dream-team” so far: in addition to an already solid line-up from his campaign, including Austan Goolsbee and Jason Furman, Obama has named Tim Geithner, Larry Summers, Paul Volcker, Christina Romer and Melody Barnes to substantial positions.

Despite his successful, and largely moderate, appointments to both economic and public policy positions, Obama is still missing some key names. Forget for an instant the opportunity to name newly minted Nobel Laureate Paul Krugman or eminent Yale economist Robert Shiller to his team (a topic for another day), Obama has failed to reach out to ardent supporter and logical appointee Joseph E. Stiglitz.

Some background: Stiglitz is a professor of economics at Columbia and the winner of the 2001 Nobel Prize in Economic Sciences for his contribution to the study of the effects of information asymmetry (as well as the recipient of the 1979 John Bates Clark Medal). Stiglitz has a wealth of academic and policy experience: he has held previous appointments at Yale, Stanford, Oxford and Princeton, he was the chair of the President’s Council of Economic Advisors under Clinton, and served as the Senior Vice President Chief Economist of the World Bank. He is also connected to the Obama campaign team: he tapped Furman as an assistant in the Clinton Administration while Furman was at Harvard, he previously advised Obama, and has been an outspoken Obama supporter for the balance of the primaries and general campaign. He’s also had time to write a book or two (Globalization and Its Discontents, The Roaring Nineties, Making Globalization Work, etc.) .

A recent Newsweek article wonders why Stiglitz has been left out in the cold. He has been right about the crisis all along, the author says, but has been frozen out by Obama, who has favoured “center-right” policymakers and advisors. Some have speculated that Stigiltz’s frosty relationship with Larry Summers is a major reason for the lack of call. The two have bickered for decades and Stiglitz was particularly critical of Reagan-vintage economic policy and the liberalization of international capital flows (financial globalisation) under Clinton economic advisors like Summers, Geither and Robert Rubin. Rumours abound that Summers was responsible for Stiglitz’s early resignation from the World Bank in 1999.

Stiglitz has, in fact, been largely prescient about the problems that plague the financial system today: he was an ardent critic of the Rubin-supported Glass-Steagal repeal (allowing commercial and investment banks to climb back into bed together); he criticized the 1997 liberalization policies of the IMF (which would cause a major currency crisis in East Asia that same year); and he pointed out the perverse incentives behind mortgage securitization as far back as 1990. Stiglitz explicitly stated the problem that the banks would have “[less] incentives to screen loan applicants”. He didn’t mention the mortgage supervisors would be drug addicts as well, but he was more or less right.

Stiglitz has openly criticized Summers’ hypocrisy with respect to regulatory transparency requirements. In the 1990s, Summers suggested that countries in the developing world required additional transparency, but that a lack of transparency was necessary in the developed world to incentivize information acquisition through innovation. This hasn’t turned out well according to Stiglitz: banks and other financial institutions (as well as financial sponsors) don’t know what’s on their own balance sheet, so there’s no chance they will lend to other institutions anytime soon.

In the wake of the moral hazard incurred in the government-sponsored bailouts, Stiglitz has proposed a broad, macro policy program to help stem the tide and perhaps guard against future crises. The first step would be to create a “Financial Products Safety Commission”. This body would be tasked with the critical analysis of new financial products and answer the questions of purpose and viability – in other words, what are the incentives around this product and is it really managing and reducing risk, or is it actually creating risk? Increased regulatory control would allow the government to push innovators to create products that would help manage real risks in the real economy that affect real taxpayers (i.e., how an individual can manage the risks associated with interest rate movements, unemployment, home prices, etc.).

A second domestic agency, the “Financial System Oversight Commission”, would be required. This would focus on the asymmetrical incentives (Stiglitz’s specialty) that market participants face on a regular basis. For example, bonuses on Wall Street are essentially call options on bank profits. This means that bankers and traders receive a base salary regardless of market conditions. They then receive bonuses over and above this floor, which represents their “share” in bank profits. Any rational actor would try and maximize their upside at any cost, since they cannot incur losses (remember, the compensation structure is their implicit hedge against losses). Assuming risk-taking is indeed commensurate with returns, their best bet would be too take excessive risks (hiding them as much as possible from internal and external bank regulators!) and try and make hay while the sun shines. If things blow up (as they have) they may lose their jobs but there would be very little tangible financial cost (plus the present value of their future potential earnings, the opportunity cost) and they should have lots of money to live off of left over from the good times – unless their personal balance sheets were overleveraged like that of their employers. The preceding is just one problem the Commission would be charged with addressing.

Stiglitz argues reforms must go beyond domestic policies and into the realm of international policies. Again, it’s all about incentives. For success, the system requires corporate and government cooperation and delegation of responsibilities to appropriate domestic officials. For example, international finance issues cannot just be the realm of Central Bankers and Finance Ministers – they represent the interests of financiers and investors, not necessarily the taxpayers. More stakeholders need representation in the process, he says. The nature of globalisation, particularly with respect to finance, is that externalities and public goods are either naturally occurring or needed to make sure the system is healthy. The only way to achieve this is by cross-border cooperation and strong institutional governance, exactly what Stiglitz is advocating. The UN, IMF, WTO, etc. are all weak or have inappropriate mandates. System-wide change is needed.

Stiglitz clearly has both the academic and international policy pedigree that the US government needs so desperately right now, not to mention the foresight to have identified a crisis in the making and a plan to solve it. What then is the hold-up Mr. Obama?