Let banks fail, says Nobel economist Joseph Stiglitz

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4424418/Let-banks-fail-says-Nobel-economist-Joseph-Stiglitz.html

Let banks fail, says Nobel economist Joseph Stiglitz

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.

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And we should have done the same thing. Instead, Bush and then Obama have bailed out the bankers to the tune of hundreds of billions of dollars. We will all be paying for that, and the bankers will just do the same thing again knowing that they own Washington and will get bailed out again.

was a brilliant idea. I can't imagine why Obama didn't listen to all the geniuses who suggested it.

There are literally thousands and thousands of healthy banks that would take up the slack. It's only some figure less than five percent that were in dire trouble and in danger of going bankrupt.

Besides, it's not like our continuing to prop up these zombie banks is working out real well, in fact I suspect that much like Japan during the nineties, these zombie banks are continuing to be a huge drag on our economy and will continue to be so for years and years to come.

We have/had two real effective choice, either the Swiss method of taking over the banks, cleaning them up and then reprivatizing them, or simply let them fail and let the rest of the banking sector take up the slack. This third option of pumping billions of dollars down a rat hole is the worst possible option.

I recall there was overwhelming support among economists for the bailout (Krugman felt it the amount wasn't enough). I don't agree that thousands of healthy banks would take up the slack. The ones that would have survived were local or regional banks. The large ones (which you erroneously refer to as zombie banks: GS, JPM, MS, C, BAC, USB, FITB, WFC, et.) would have failed because AIG was failing, due to defaults and resultant institutional insurance claims.

I think the concensus was that another Great Depression was exactly what was averted.

Now if you want to shake things up again that way, that's another issue...

and letting the bondholders take deserved losses, not the reckless giveaways we ended up being stuck with.

Zombie bank is precisely the right term, btw.

that's the rub.

You supply siders (DLCers, Obama corporatists, neodemocrats, et al) believe banks and Wall Street and their games that enrich the few at the expense of the many are the "entire economy."

Others believe that the economy is everyone.

We the people will never be whole again until the Dow goes to zero and the multinational banks cease to exist.

You get it!! And you can explain it in small, easy-to-understand words for those who can't, don't, or won't get it. :patriot:

Bailing out the capitalists has worked ever so well...except that it didn't.