Let banks fail, says Nobel economist Joseph Stiglitz

Haidar, Suhasini. Jan 29, 2017. Trump makes sense to a grocery store owner. thehindu.com

Economist-mathematician Nassim Nicholas Taleb is seen as something of an oracle, given that he saw the 2008 economic crash coming, predicted the Brexit vote, and the outcome of the Syrian crisis. Do you see another crisis coming?

Oh, absolutely! The last crisis [2008] hasn’t ended yet because they just delayed it. Obama… didn’t fix the economic system, he put Novocain in the system. He delayed the problem by working with the bankers whom he should have prosecuted. And now we have double the deficit to create six million jobs, with a massive debt and the system isn’t cured. We retained zero interest rates, and that hasn’t helped. Basically we shifted the problem from the private corporates to the government in the U.S. So, the system remains very fragile.  People don’t realize that Obama created inequalities when he distorted the system. You can only get rich if you have assets. 

Feb 2, 2009 www.telegraph.co.uk/finance/

The Government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice, according to Joseph Stiglitz, the Nobel Prize-winning economist. Professor Stiglitz, the former chair of the White House Council of Economic Advisers, told The Daily Telegraph that Britain should let the banks default on their vast foreign operations and start afresh with new set of healthy banks.

“The UK has been hit hard because the banks took on enormously large liabilities in foreign currencies. Should the British taxpayers have to lower their standard of living for 20 years to pay off mistakes that benefited a small elite?” he said. “There is an argument for letting the banks go bust. It may cause turmoil but it will be a cheaper way to deal with this in the end. The British Parliament never offered a blanket guarantee for all liabilities and derivative positions of these banks,” he said. Mr Stiglitz said the Government should underwrite all deposits to protect the UK’s domestic credit system and safeguard money markets that lubricate lending. It should use the skeletons of the old banks to build a healthier structure. “The new banks will be more credible once they no longer have these liabilities on their back.”

Mr Stiglitz said the City of London would survive the shock of such a default because it would uphold the principle of free market responsibility. “Counter-parties entered into voluntary agreements with the banks and they must accept the consequences,” he said. Such a drastic course of action would be fraught with difficulties and risks, however. It would leave healthy banks in an untenable position since they would have to compete for funds in the markets with state-run entities. Mr Stiglitz’s radical proposal is a “Chapter 11” scheme for households to allow them to bring their debts under control without having to go into bankruptcy. “Families matter just as much as firms. The US government can borrow at 1pc so why can’t it lend directly to poor people for mortgages at 4pc. ,” he said.

Feb 3, 2009 German news service Deutsche Welle asks Stiglitz:

Q: Economists Nouriel Roubini and Nassim Taleb, who predicted the global economic downturn, have called for a nationalization of banks in order to stop the financial meltdown. Do you agree?

A: The fact of the matter is, the banks are in very bad shape. The U.S. government has poured in hundreds of billions of dollars to very little effect. It is very clear that the banks have failed. American citizens have become majority owners in a very large number of the major banks. But they have no control. Any system where there is a separation of ownership and control is a recipe for disaster. Nationalization is the only answer. These banks are effectively bankrupt.

In 2010 Stiglitz said “What is needed is a quick write-down of the value of the mortgages. Banks will have to recognise the losses and, if necessary, find the additional capital to meet reserve requirements. This, of course, will be painful for banks , but their pain will be nothing in comparison to the suffering they have inflicted on people throughout the rest of the global economy.”

Ilargi at theautomaticearth replies “The reality is though, and it’s hard to believe Stiglitz doesn’t see this, that if mortgage values are written down to realistic levels, i.e. levels that a nation of debt ridden consumers could buy a home at, it wouldn’t just be painful to the banks, it would kill them outright. As it would the US government, which has untold trillions in both mortgages and securities bet on the notion that it can keep those levels up. Neither the government nor the banks, have any intention of letting that happen, unless it becomes inevitable. By which time they wager they’ll have secured as much and as many of their own interests at the cost of the American people as they possibly can.”

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