Stiglitz - Bankers must go to jail

Joseph Stiglitz tells Ben Chu that rogue financiers have proven that regulation must get
tougher

Ben Chu
Monday, 2 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