Paris: Nobel Prize-winning economist Joseph Stiglitz has said the US has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.
In the US and many other countries, the too-big-to-fail banks have become even bigger, Stiglitz said in an interview on Sunday. 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 US President Barack Obama’s administration to curtail the size of banks, and Bank of Israel governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing excessively.
Broader perspective: Nobel laureate Joseph Stiglitz says the country is going into an extended period of weak economy, of economic malaise. Ramesh Pathania / Mint
A year after the demise of Lehman forced the treasury department to spend billions to shore up the financial system, Bank of America Corp.’s assets have grown and Citigroup Inc. remains intact. In the UK, Lloyds Banking Group Plc, 43% owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.
While Obama wants to name some banks as systemically important and subject them to stricter oversight, his plan wouldn’t force them to shrink or simplify their structure.
Stiglitz said the US government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of Twenty (G-20) leaders will cajole the US into tougher action.
“We aren’t doing anything significant so far, and the banks are pushing back,” said Stiglitz.
The leaders of G-20 will take some small steps forward, given the power of the banks and any step forward is a move in the right direction.
G-20 leaders gather on 24-25 September in Pittsburgh and will consider ways to improve regulation of financial markets and, in particular, how to set tighter limits on remuneration for market operators. Under pressure from France and Germany, G-20 finance ministers earlier this month reached a preliminary accord that included proposals to reduce 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, former chief economist at the World Bank and member of the White House Council of Economic Advisers, said the world economy is 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 will 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.
The Federal Reserve faces a quandary in ending its monetary stimulus programmes because doing so may drive up the cost of borrowing for the US government, he said.
“The question then is who is going to finance the US government,” Stiglitz said.
Stiglitz gave the interview before presenting a report to French President Nicolas Sarkozy that urged world leaders to drop the obsession for focusing on gross domestic product in favour of broader measures of prosperity.
“GDP has increasingly become used as a measure of societal well being and changes in the structure of the economy and our society have made it increasingly poor one,” Stiglitz said.
Assessing government’s contribution to economic output, which ranges from 39% in the US to 48% in France, is one of the shortcomings of the GDP model, as is its difficulty in estimating improvements in quality of products such as cars instead of just quantity, Stiglitz said.