Joseph Stiglitz: Failure To Enact Meaningful Derivative Reform — “A Sad Day For Democracy”

Joseph E. Stiglitz, Nobel prize winner and Columbia University professor, writes that big banks are pushing hard to stop any government regulation on derivatives. He writes that, “the Obama administration and the Fed, in opposing these restrictions, have clearly lined up on the side of big banks,”and writes that if, after this huge financial crisis, our democracy cannot deliver new regulation for such dangerous banking practices, it will be “a sad day for democracy.”

Excerpts from Stiglitz post, “Financial Re-Regulation and Democracy”:

  • 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.
  • Most of those responsible for the mistakes … 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.
  • 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.
  • A court of law will decide whether Goldman Sachs’ behavior – betting against products that it created – was illegal. But the court of public opinion has already rendered its verdict on the far more relevant question of the ethics of that behavior. That Goldman’s CEO saw himself as doing “God’s work” as his firm sold short products that it created, or disseminated scurrilous rumors about a country where it was serving as an “adviser,” suggests a parallel universe, with different mores and values.
  • The problem of too-big-to-fail banks is now worse than it was before the crisis. Increased resolution authority will help, but only a little: in the last crisis, US government “blinked,” failed to use the powers that it had, and needlessly bailed out shareholders and bondholders – all because it feared that doing otherwise would lead to economic trauma. As long as there are banks that are too big to fail, government will most likely “blink” again.
  • The US government would be remiss to leave things as they are. 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 (whether actually insured, or effectively insured because they are too big to fail) survive in the final version of the bill, the general interest might indeed prevail over special interests, and democratic forces over moneyed lobbyists.
  • 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.
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