We are "Worse off than before Lehman" - Oh Noes!!

[MadImmortalMan]

http://www.bloomberg.com/apps/news?pid=20601087&sid=aYdgQkXu9eBg

Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman
By Mark Deen and David Tweed

Sept. 13 (Bloomberg) -- Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. 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 U.S. and many other countries, the too-big-to-fail banks have become even bigger," Stiglitz said in an interview today in Paris. "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 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."

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 U.K., Lloyds Banking Group Plc, 43 percent 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 U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.


"We aren't doing anything significant so far, and the banks are pushing back," he said. "The leaders of the G-20 will make 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 next week in Pittsburgh and will consider ways of improving 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 last week reached a preliminary accord that included proposals to claw-back cash awards and linking compensation more closely to long-term performance.

"It's an outrage," especially "in the U.S. 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 U.S. 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 U.S. will generate the demand that the world economy needs."

The Federal Reserve faces a "quandary" in ending its monetary stimulus programs because doing so may drive up the cost of borrowing for the U.S. government, he said.

"The question then is who is going to finance the U.S. government," Stiglitz said.

I guess the point that the "too big to fail" banks are now even bigger than before is kind of an obvious criticism. Are they "too big NOT to fail" now? Should we pull out the trustbusting stick and crack them into smaller chunks?

[Syt]

Is Joseph Stiglitz related to Hugo Stiglitz?

[Caliga]

Is he related to the Sniglets guy?  My favorite sniglet was "pediddel".  Good times. *wipes away tear*

[DGuller]

This is my worst fear, that we learned nothing from this crisis.  Obama spoke all the right words, but as with other issues, proved to be rather impotent in practice.

[crazy canuck]

This is my worst fear, that we learned nothing from this crisis.  Obama spoke all the right words, but as with other issues, proved to be rather impotent in practice.

Not sure what the President can do to reduce the size of your financial institutions given how big the concentration became before he stepped foot in office.

In hindsight our government took a lot of industry heat for not letting them grown bigger but that saved us from the same bank failures the US encountered.

[Ed Anger]

Is he related to the Sniglets guy?  My favorite sniglet was "pediddel".  Good times. *wipes away tear*

Rich Hall? He's still floating around out there.

[DGuller]

Not sure what the President can do to reduce the size of your financial institutions given how big the concentration became before he stepped foot in office.

He can do a lot, or at least lead the effort.  He can put a lot of emphasis on financial regulation reform, which might automatically lead to disassembly of financial behemoths.  AFAIK, he hasn't done that so far, and with each passing day the memory of the clusterfuck would be further behind us.

I still have hope that Bernanke would come through with something.  It seems clear that at least now he understands how dangerously unstable the current setup is, and how it needs changing.  However, he may also be the guy knowing what words to say, without knowing how to actually accomplish what he's talking about.

[Eddie Teach]

Why Pittsburgh?

[Agelastus]

It seems to be a fair bet that HBOS and Lloyds will be broken back up should the Tories win the next election over here. Judging by the non-activity of Lloyds management in extracting savings from the merger, I suspect Lloyds management believe this to be the case.

[crazy canuck]

Not sure what the President can do to reduce the size of your financial institutions given how big the concentration became before he stepped foot in office.

He can do a lot, or at least lead the effort.  He can put a lot of emphasis on financial regulation reform, which might automatically lead to disassembly of financial behemoths.  AFAIK, he hasn't done that so far, and with each passing day the memory of the clusterfuck would be further behind us.

I still have hope that Bernanke would come through with something.  It seems clear that at least now he understands how dangerously unstable the current setup is, and how it needs changing.  However, he may also be the guy knowing what words to say, without knowing how to actually accomplish what he's talking about.

But the President cant really do anything on his own.  If the rest of congress isnt with him he is nothing but a figurehead.  Not saying that is a bad thing.  Its just that you cant expect a figure head to do much in the way of substantive reform without a lot of help.

[alfred russel]

Not sure what the President can do to reduce the size of your financial institutions given how big the concentration became before he stepped foot in office.

He can do a lot, or at least lead the effort.  He can put a lot of emphasis on financial regulation reform, which might automatically lead to disassembly of financial behemoths.  AFAIK, he hasn't done that so far, and with each passing day the memory of the clusterfuck would be further behind us.

I still have hope that Bernanke would come through with something.  It seems clear that at least now he understands how dangerously unstable the current setup is, and how it needs changing.  However, he may also be the guy knowing what words to say, without knowing how to actually accomplish what he's talking about.

But the President cant really do anything on his own.  If the rest of congress isnt with him he is nothing but a figurehead.  Not saying that is a bad thing.  Its just that you cant expect a figure head to do much in the way of substantive reform without a lot of help.

There are a lot of regulatory reforms that can go through without congressional approval. But to the extent he needs congress, he can't really blame their unwillingness to go along when he hasn't pushed for much of anything.

[Valmy]

But the President cant really do anything on his own.  If the rest of congress isnt with him he is nothing but a figurehead.  Not saying that is a bad thing.  Its just that you cant expect a figure head to do much in the way of substantive reform without a lot of help.

Likewise if the President if not with Congress, they are nothing but a debating society...unless they can get 2/3rds of their members to agree.

[Admiral Yi]

There seems to be a certain amount of circularity to this argument (also advanced by the former chief economist of the Fund, who's name I forget).

We must reduce the size of banks that are too big to fail.
Why?
Because they have too much lobbying power.
How do they use this power?
To block legislation.
What kind of legislation?
Legislation that would reduce the size of banks that are too big to fail.

It's important to keep in mind that the Fed decided to *force* the largest US banks to take TARP money whether they wanted it or not.

It's also important to keep in mind that the biggest sink hole of TARP money--AIG--is in the process of shrinking itself out of business.  It wasn't too big to fail; it was too complicated to seize and flip in a quick and easy process.

[alfred russel]

There seems to be a certain amount of circularity to this argument (also advanced by the former chief economist of the Fund, who's name I forget).

We must reduce the size of banks that are too big to fail.
Why?
Because they have too much lobbying power.
How do they use this power?
To block legislation.
What kind of legislation?
Legislation that would reduce the size of banks that are too big to fail.

It's important to keep in mind that the Fed decided to *force* the largest US banks to take TARP money whether they wanted it or not.

It's also important to keep in mind that the biggest sink hole of TARP money--AIG--is in the process of shrinking itself out of business.  It wasn't too big to fail; it was too complicated to seize and flip in a quick and easy process.

I can't speak for the former chief economist you are referring to, but I haven't heard anyone cite "too big to fail" as a problem because of excessive lobbying power. Bigger problems are the socialization of losses, the competitive advantage the "too big to fail" banks get from implicit government guarantees of debt, and the incentive the companies have to speculate in ways that would otherwise put their existence in jeopardy.

[The Minsky Moment]

"Too big to fail" is a bit of a red herring.  The government doesn't choose to step in based on size but based on danger of systemic risk.  A bunch of small, interrelated banks can pose as much if not more systemic risk then one or two large banks.  America in the late 20s had lots of small banks and they were absolutely annihilated by runs in the Great Depression, to much more damaging effect than in the most recent crisis.

the real problem is that the entire financial system consists of a complex web of mutual dependencies and institutions, and that will always be the case regardless of industry structure in terms of number and size of firms.  When a very large bubble bursts suddenly, all the participants call in their mutual obligations and scramble for cash.  In this setting, there can be an advantage to size from a regulatory point of view.  It is arguably easier to monitor and keep track of a few dozen very large institutions as opposed to hundreds of smaller ones.  Larger institutions often have multiple operations and even in a crisis, some operations can serve as a "source of strength" to others -- indeed, one of the reasons AIG has not been a total loss is that its insurance subs continued to retain significant value and throw of cash.

IMO any regulatory prescription that focuses on size of individual institutions and antitrust remedies is focusing on the wrong thing.  The focus needs to be on the systemic weakness of financial systems in modern capitalist market economies, and the remedies focusing on strenghtening the system as a whole and rendering it more robust to shock.