Nobel Laureate economist Joe Stiglitz says the banking industry is in worse shape than it was pre-Lehman.
Bloomberg: “In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview yesterday in Paris. “The problems are worse than they were in 2007 before the crisis.”
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,” said Stiglitz, a Columbia University professor. “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.”
So when he says that the problems are worse than they were in 2007, he’s not actually talking about stuff like toxic assets and leverage and risk taking. He’s essentially describing the too-big-to-fail problem, and the ability of large banks to loot the system know they’ll be backed up.
And on this point he’s basically right. The bailouts solidifed too-big-to-fail as a notion, which is why, try as we might, we can’t honestly talk about removing financial system safeguards, since everybody knows they’ll be put back in again once things get rough. That’s why a key part of the solution, and Stiglitz identifies this, has to be breaking up the true zombies, like Citigroup (C), so that it’s not constantly posing a threat to the entire banking sytem.