Advanced Search

The story appears on

Page A6

June 8, 2010

GET this page in PDF

Free for subscribers

View shopping cart

Related News

Home » Opinion » Foreign Views

Too-big-to-fail banks still unruly monsters

By Joseph E. Stiglitz | June 8, 2010, Tuesday | Print Edition

IT has taken almost two years since the collapse of Lehman Brothers, and more than three years since the beginning of the global recession brought on by the financial sector's misdeeds for the United States and Europe finally to reform financial regulation.

Perhaps we should celebrate the regulatory victories in both Europe and the United States. After all, there is almost universal agreement that the crisis the world is facing today - and is likely to continue to face for years - is a result of the excesses of the deregulation movement begun under Margaret Thatcher and Ronald Reagan 30 years ago. Unfettered markets are neither efficient nor stable.

But the battle - and even the victory - has left a bitter taste. Most of those responsible for the mistakes - whether at the US Federal Reserve, the US Treasury, Britain's Bank of England and Financial Services Authority, the European Commission and European Central Bank, or in individual banks, have not owned up to their failures.

Banks that wreaked havoc on the global economy have resisted doing what needs to be done. Worse still, they have received support from the Fed, which one might have expected to adopt a more cautious stance, given the scale of its past mistakes and the extent to which it is evident that it reflects the interests of the banks that it was supposed to regulate. This is important not just as a matter of history and accountability: much is being left up to regulators. And that leaves open the question: can we trust them?

To me, the answer is an unambiguous no, which is why we need to "hard-wire" more of the regulatory framework. The usual approach - delegating responsibility to regulators to work out the details - will not suffice.

And that raises another question: whom can we trust? On complex economic matters, trust had been vested in bankers and in regulators. But the events of recent years have shown that bankers can make megabucks, even as they undermine the economy and impose massive losses on their own firms.

As always, the "devil is in the details," and financial-sector lobbyists have labored hard to make sure that the new regulations' details work to their employers' benefit. As a result, it will likely be a long time before we can assess the success of whatever law the US Congress ultimately enacts.

But the criteria for judgment are clear: the new law must curb the practices that jeopardized the entire global economy.

We should toast the likely successes: some form of financial-product safety commission will be established; more derivative trading will move to exchanges and clearing houses from the shadows of the murky "bespoke" market; and some of the worst mortgage practices will be restricted. But the likely failures are equally noteworthy. In particular, the problem of too-big-to-fail banks is now worse than it was before the crisis.

It is no surprise that the big banks succeeded in stopping some essential reforms; what was a surprise was a provision in the US Senate's bill that banned government-insured entities from underwriting risky derivatives.

Such government-insured underwriting distorts the market, giving big banks a competitive advantage, not necessarily because they are more efficient, but because they are "too big to fail."

The Senate bill's provision on derivatives is a good litmus test: the Obama administration and the Fed, in opposing these restrictions, have clearly lined up on the side of big banks.

If effective restrictions on the derivatives business of government-insured banks survive in the final version of the bill, the general interest might indeed prevail over special interests, and democratic forces over moneyed lobbyists. But if, as most pundits predict, these restrictions are deleted, it will be a sad day for democracy - and a sadder day for prospects for meaningful financial reform.

(The author is University Professor at Columbia University and a Nobel laureate in Economics. Copyright: Project Syndicate, 2010. www.project-syndicate.org. Shanghai Daily condensed the article.)

Foreign Views


 

Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.

沪公网安备 31010602000204号

Email this to your friend