Video: Nobel Prize winning economist Professor Joseph Stiglitz speaks with Kerry O'Brien -- ABC Australia
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Excerpt:
The other issue that was on the table was what to do about the banks. We had already, at that juncture, poured money, huge amounts of money, into the banks. Most of us were of the view that, if you needed another round of a bailout - hopefully that wouldn't be the case - you had to do it a lot better than they had, because the banks have resumed their bonuses, profits from speculation, from trading are at very high levels and yet the supply of credit isn't there.
KERRY O'BRIEN: So the banks got the money but credit didn't restart.
JOSEPH STIGLITZ: Exactly. And unfortunately nothing was done about that.
KERRY O'BRIEN: President Obama has finally got a package of reforms through - regulatory reforms on the banks. Has he addressed the fundamental problems with those reforms?
JOSEPH STIGLITZ: I think they've made a big step forward in principle, and that's what I think is so interesting about the bill. It will list a set of principles that I think, you know, to me, were a big step forward. But on almost every one of the principles, the banks came in with their political power and gutted or at least eviscerated the provision. Let me just give you an example: we said important for there to be transparency in financial markets, important for there to be transparency in derivatives. Remember, derivatives - the bailout of AIG was $180 billion. That's an amount of money that's hard to fathom. One company, and it was all caused by derivatives. So, everybody said we better regulate derivatives better, we oughta have more sunshine, we oughta have more transparency and they agreed on the principle, but 30 per cent of the market was exempt. Now, why? Why should you not have everything out in the sunshine? Not clear to me.
KERRY O'BRIEN: Too hard?
JOSEPH STIGLITZ: The obvious reason: politics. The influence of the banks. The most disappointing thing where they didn't get the principle right was the too-big-to-fail banks.
KERRY O'BRIEN: Well President Obama said no longer will that be allowed to happen, where the banks are too big to fail. Now is that true?
JOSEPH STIGLITZ: No. I mean - and that statement was, to me, the biggest disappointment: his overselling what had been accomplished. What we did in the bill is to say, “The Government has more powers." But the issue isn't powers. If you're too big to fail, government will bail you out and it will bail out the shareholders and the bondholders.
KERRY O'BRIEN: Can the whole thing happen again?
JOSEPH STIGLITZ: It can and it almost surely will happen again, because we didn't deal with the problem of too-big-to-fail banks. It is one of the reasons why it will happen again. And we didn't really deal effectively with all the kinds of excessive risk-taking, all the problems of lack of transparency that were at the core of this crisis. And so, yes, we understand what the issues are, we understand the issues better than we did three years ago, but politics intruded the power of the banks, was too great. They're making $20 billion off of derivatives. So rather than lending, they're engaged in all of these kinds of gambling and excessive risk-taking and generating large profits, but it's not helping the American economy and it's putting at risk American taxpayers.
KERRY O'BRIEN: In your view, how close did the global financial system genuinely come to a collapse?
JOSEPH STIGLITZ: That's a good question, and I think it actually came very close to a collapse, and by that I mean the following. The various banks knew that they didn't know their own balance sheet. They had engaged in this off-balance-sheet accounting, tricky accounting, deceptive accounting, to deceive their shareholders, the regulators, tax authorities, but they were so successful that they couldn't tell what their ...
KERRY O'BRIEN: They didn't know themselves.
JOSEPH STIGLITZ: But that meant they knew that they couldn't know the position of any other firm. Now, for our financial system ...
KERRY O'BRIEN: What you're saying is that the entire financial system was flying blind.
JOSEPH STIGLITZ: Exactly. And we saw that. I mean, one company, AIG, losing $180 billion and that was the company that was providing the insurance to all the other companies! So, what kept the system going was the belief that government would bail them out.