Joseph Stiglitz: Bankers Made Reckless Bets on the Economy, Knowing Taxpayers Were Going to Pick up the Tab
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So in my mind you have to do something. Both because of this distorted playing field, but also because the too-big-to-fail banks have this bias toward risk-taking. If they gamble and they win they walk off with the profits. They lose, we, the taxpayers, pick up the losses.
So something has to be done. Taxes can make a big difference, they can help level the playing field, and there have been proposals for that. I'm not sure, though, that that's going to be enough, and here's why. Those who run the banks have interests that are not necessarily coincident with the banks' shareholders and bondholders. We saw that over and over and over again. The bankers have done very well, but the shareholders and bondholders have not always done so well. So we probably need to go further than tax policy.
I argue that we need a three-pronged approach. Higher taxes and higher capital adequacy requirements to level the playing field are the first prong. The second thing we need to do is take serious structural measures like breaking them up. We should not allow banks that accept deposits to engage in proprietary trading. We shouldn't allow them to own insurance companies, and so forth either. By forcing companies to focus on one thing rather than allowing them to conduct four different kinds of financial business, we will actually increase the efficiency of our economy. And finally, at the end, we have to make sure that they don't undertake excessive risk.
ZC: Paul Volcker wants to ban proprietary trading by commercial banks, but said recently that he's not in favor of bringing back the Glass-Steagall separation between commercial banking and investment banking. Is that enough?
JS: Well, I'm in absolute agreement that you have to ban proprietary trading and he's seen the risk of that. But I think you need to go a lot further than he seems to be willing to go at the current time. First, we have to do something about the too-big-to-fail investment banks. Goldman Sachs, we'll bail it out, AIG we'll bail it out. We need to make sure that our reforms don't just address the depository institutions, but all of the large financial institutions that pose the problem. Back in the 1990s we even engineered a bailout for the largest hedge fund, Long-Term Capital Management. So you have to go beyond the depository institutions, beyond traditional commercial banks.
And secondly, there are lots of forms of risk-taking. Proprietary trading is one, but for instance, the big banks are issuing these derivatives, these credit default swaps that brought down AIG. And that means if they're issuing them, the U.S. taxpayer is underwriting them because we underwrite the commercial banks. That means we, ultimately, are bearing the risk. We shouldn't be participating in this kind of gambling.
ZC: As soon as Goldman Sachs got its bank holding company status in 2008, the first thing it did was move all its derivatives operations under the commercial bank unit. It was very clear it wanted to use deposits to fund that business.
ZC: We've talked a lot about banks so far, but there is more to the economy than banking. It's been a really bad year for American households. Do we need a second stimulus? If so, what should it look like?
JS: We clearly need a second stimulus. There are a couple of ways of seeing this. When the Obama administration first moved on the stimulus, it posed a scenario that was not really rosy, but one that proved a little too optimistic. It expected unemployment without the stimulus it would be around 10 percent, with the stimulus it would be brought down to 8 percent. Others like me thought things were going to be much worse, that without the stimulus, unemployment would be around 12 percent and with the stimulus, it would be about 10 percent. And the pessimists were right. Well, when the world turns out to be worse than you thought it would, you have to adjust what you do.
But even a much bigger stimulus would have only brought the unemployment rate down to about 8 percent, which is still totally unacceptable. So right now I am very much in favor of a second round of stimulus. Hopefully, it will be better designed and more targeted to job creation and actually stimulating the economy. The tax cuts in the first round weren't designed really to stimulate the economy very much and didn't work very effectively.
ZC: And what do you do to create jobs? Are we talking fiscal aid to states? Unemployment benefits? A new WPA?
JS: The first thing I would do is aid to the states. The states have balanced budget frameworks. The revenues are down by around $200 billion because of the recession. If they don't get aid, they have to either raise taxes—which is very hard in the current environment—or cut back expenditures. And what they inevitably cut are teachers, nurses, firefighters and a whole set of crucial public services which are all the more important in an economic recession.
So the first thing is to provide states with money, and that spending goes right to the economy very quickly. You don't have to set up new programs and it really does save jobs. I would also do one of the things that Obama is pushing now which are job credits to encourage companies to hire more workers. Focus a little bit more direct attention on jobs. We don't know how effective these are going to be. There is some debate, but it seems to me that if we don't try we're not going to get anywhere.