Joseph
Stiglitz: 'None of them have gone to jail' - man who ran World Bank
calls for bankers to face the music
Joseph
Stiglitz tells Ben Chu that rogue financiers have proven that
regulation must get tougher
3
July, 2012
The
Barclays Libor scandal may have shocked the British public, but
Joseph Stiglitz saw it coming decades ago. And he's convinced that
jailing bankers is the best way to curb market abuses. A towering
genius of economics, Stiglitz wrote a series of papers in the 1970s
and 1980s explaining how when some individuals have access to
privileged knowledge that others don't, free markets yield bad
outcomes for wider society. That insight (known as the theory of
"asymmetric information") won Stiglitz the Nobel Prize for
economics in 2001.
And
he has leveraged those credentials relentlessly ever since to batter
at the walls of "free market fundamentalism".
It
is a crusade that has taken Stiglitz from Massachusetts Institute of
Technology, to the Clinton White House, to the World Bank, to the
Occupy Wall Street camp and now, to London, to promote his new book
The Price of Inequality.
And
kind fortune has engineered it so that Stiglitz's UK trip has
coincided with a perfect example of the repellent consequences of
asymmetric information.
When
traders working for Barclays rigged the Libor interest rate and
flogged toxic financial derivatives – using their privileged
position in the financial system to make profits at the expense of
their customers – they were unwittingly proving Stiglitz right.
"It's
a textbook illustration," Stiglitz said. "Where there are
these asymmetries a lot of these activities are directed at rent
seeking [appropriating resources from someone else rather than
creating new wealth]. That was one of my original points. It wasn't
about productivity, it was taking advantage."
Yet
Stiglitz's interest in the abuses of banks extends beyond the
academic. He argues that breaking the economic and political power
that has been amassed by the financial sector in recent decades,
especially in the US and the UK, is essential if we are to build a
more just and prosperous society. The first step, he says, is sending
some bankers to jail. " That ought to change. That means
legislation. Banks and others have engaged in rent seeking, creating
inequality, ripping off other people, and none of them have gone to
jail."
Next,
politicians need to stop spending so much time listening to the
financial lobby, which, according to Stiglitz, demonstrates its
spectacular economic ignorance whenever it claims that curbs on
banks' activities will damage the broader economy.
This
talk of economic ignorance brings us to the eurozone crisis and the
extreme austerity policies being pursued. Stiglitz is depressed. In
2000 he resigned from the World Bank and launched an excoriating
attack on the way it and its sister institution, the International
Monetary Fund, handled the Asian financial crisis of the late 1990s.
He condemned the IMF for imposing brutal and inappropriate adjustment
policies on bailed out nations – medicine which, he argued, merely
pushed nations further into crisis. "For me there's some
nostalgia here," he says.
Does
he see any hope for the eurozone, I ask, or is it now heading,
inevitably, for a breakup? "It is a train that can still be
stopped" he says. "But the relevant question is the
politics in Germany. Have they created in their rhetoric a dynamic
that makes it difficult to stop? In particular [German Chancellor]
Angela Merkel's rhetoric that the crisis was caused by profligacy.
She's framed the issue as profligacy, rather than framing it as 'the
European system is fundamentally flawed' ".
The
central argument of his latest oeuvre is that the huge inequalities
of income and wealth that have developed in the US and elsewhere in
the West over recent decades are not only unjust in themselves but
are retarding growth.
"Every
economy needs lots of public investments – roads, technology,
education," he says. "In a democracy you're going to get
more of those investments if you have more equity. Because as
societies get divided, the rich worry that you will use the power of
the state to redistribute. They therefore want to restrict the power
of the state so you wind up with weaker states, weaker public
investments and weaker growth."
It's
an elegantly simple proposition. And one that logically points to a
radical manifesto of redistribution and higher taxation in the name
of the general public good. Time will tell whether this comes to be
regarded as another manifestation of towering economic genius. But,
for now, crusading Stiglitz has one more weapon in his hands with
which to batter down those walls of folly.
Joseph
Stiglitz: A life in brief
Born:
Gary, Indiana in 1943
Educated:
Amherst college, in New England. Later, Massachusetts Institute of
Technology
Career:
Nobel Prize-winning economist and former member of President
Clinton's administration during his time in the White House and,
latterly, an adviser to President Obama. He is currently a professor
at Columbia University
Family:
Married to Anya Schiffrin, a professor at Columbia
FYI:
Stiglitz' home town also produced Paul Samuelson, the first American
winner of the Nobel Prize for economics
Stiglitz
wrote of Samuelson: "Paul allegedly once wrote a letter of
recommendation for me which summarised my accomplishments by saying
that I was the best economist from Gary, Indiana."
"The
Price of Inequality" by Joseph Stiglitz is published by Allen
Lane
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