Wednesday, June 17, 2009

Stiglitz on Banking Regulation

Given the banking regulatory overhaul recommended by the Obama administration, The Economists' Voice today published a timely piece today entitled "America's Socialism for the Rich" by Nobel-laureate Joseph Stiglitz. Here are some excerpts.

Rewriting the rules of the market economy—in a way that has benefited those that have caused so much pain to the entire global economy—is worse than financially costly. . . .

But this new form of ersatz capitalism [writing about Obama’s regulatory approach], in which losses are socialized and profits privatized, is doomed to failure. . . .

We need to break up the too-big-to-fail banks; there is no evidence that these behemoths deliver societal benefits that are commensurate with the costs they have imposed on others. And, if we don’t break them up, then we have to severely limit what they do. They can’t be allowed to do what they did in the past—gamble at others’ expenses. . . . (p. 2)

I don’t agree with everything Stiglitz writes, but his arguments are convincing. I too think that banks are too big, and I agree with his statement, "Because government provides deposit insurance, it plays a large role in restructuring (unlike other sectors)." Still, I wish Stiglitz would have discussed the moral hazards created by FDIC insurance and the Fed. Sure the government should regulate the banking industry, but it should also pay attention to the incentives it creates.

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