Stiglitz says bank problems worse than before crisis
Rescued giants now ‘even bigger’
Bloomberg in Paris 15 September 2009
Joseph Stiglitz, the Nobel Prize-winning economist, said the United States had failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers.
“In the US and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in Paris. “The problems are worse than they were in 2007 before the crisis.”
Stiglitz’s views echo those of former Federal Reserve chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel governor Stanley Fischer, who suggests that governments may want to discourage financial institutions from growing “excessively”.
A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America’s assets have grown and Citigroup remains intact. In Britain, Lloyds Banking Group, 43 per cent owned by the government, has taken over the activities of HBOS, and in France BNP Paribas now owns the Belgian and Luxembourg banking units of insurer Fortis. While Obama wants to name some banks as “systemically important” and subject them to stricter oversight, his plan would not force them to shrink or simplify their structure.
Stiglitz said the US government was wary of challenging the financial industry because it was politically difficult, and that he hoped the Group of 20 leaders would cajole the US into tougher action. “We aren’t doing anything significant so far, and the banks are pushing back,” said the Columbia University professor. “The leaders of the G20 will make some small steps forward, given the power of the banks” and “any step forward is a move in the right direction”.
G20 leaders gather on September 24-25 in Pittsburgh and will consider ways of improving regulation of financial markets. Under pressure from France and Germany, G20 finance ministers earlier this month reached a preliminary accord that included proposals to cut bonuses and linking compensation more closely to long-term performance.
“It’s an outrage,” especially “in the US where we poured so much money into the banks,” Stiglitz said. “The administration seems very reluctant to do what is necessary. Yes they’ll do something, the question is: will they do as much as required?”
Stiglitz said the world economy was “far from being out of the woods” even if it has pulled back from the precipice it teetered on after the collapse of Lehman.
“We’re going into an extended period of weak economy, of economic malaise,” Stiglitz said. The US would “grow but not enough to offset the increase in the population”, he said, adding that “if workers do not have income, it’s very hard to see how the US will generate the demand that the world economy needs”.
Stiglitz also presented a report to French President Nicolas Sarkozy that urged world leaders to drop an obsession for focusing on gross domestic product in favour of broader measures of prosperity.
Assessing government’s contribution to economic output was one of the shortcomings of the GDP model, as was its difficulty in estimating improvements in quality of products such as cars instead of just quantity, Stiglitz said.
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Stiglitz says bank problems worse than before crisis
Rescued giants now ‘even bigger’
Bloomberg in Paris
15 September 2009
Joseph Stiglitz, the Nobel Prize-winning economist, said the United States had failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers.
“In the US and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in Paris. “The problems are worse than they were in 2007 before the crisis.”
Stiglitz’s views echo those of former Federal Reserve chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel governor Stanley Fischer, who suggests that governments may want to discourage financial institutions from growing “excessively”.
A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America’s assets have grown and Citigroup remains intact. In Britain, Lloyds Banking Group, 43 per cent owned by the government, has taken over the activities of HBOS, and in France BNP Paribas now owns the Belgian and Luxembourg banking units of insurer Fortis. While Obama wants to name some banks as “systemically important” and subject them to stricter oversight, his plan would not force them to shrink or simplify their structure.
Stiglitz said the US government was wary of challenging the financial industry because it was politically difficult, and that he hoped the Group of 20 leaders would cajole the US into tougher action. “We aren’t doing anything significant so far, and the banks are pushing back,” said the Columbia University professor. “The leaders of the G20 will make some small steps forward, given the power of the banks” and “any step forward is a move in the right direction”.
G20 leaders gather on September 24-25 in Pittsburgh and will consider ways of improving regulation of financial markets. Under pressure from France and Germany, G20 finance ministers earlier this month reached a preliminary accord that included proposals to cut bonuses and linking compensation more closely to long-term performance.
“It’s an outrage,” especially “in the US where we poured so much money into the banks,” Stiglitz said. “The administration seems very reluctant to do what is necessary. Yes they’ll do something, the question is: will they do as much as required?”
Stiglitz said the world economy was “far from being out of the woods” even if it has pulled back from the precipice it teetered on after the collapse of Lehman.
“We’re going into an extended period of weak economy, of economic malaise,” Stiglitz said. The US would “grow but not enough to offset the increase in the population”, he said, adding that “if workers do not have income, it’s very hard to see how the US will generate the demand that the world economy needs”.
Stiglitz also presented a report to French President Nicolas Sarkozy that urged world leaders to drop an obsession for focusing on gross domestic product in favour of broader measures of prosperity.
Assessing government’s contribution to economic output was one of the shortcomings of the GDP model, as was its difficulty in estimating improvements in quality of products such as cars instead of just quantity, Stiglitz said.
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