Big Banks Should Be Allowed to Fail: Stiglitz

No bank should be too big to fail, noted economist and Nobel laureate Joseph Stiglitz told CNBC Wednesday.

Addressing a system of bailout programs that he thinks are misguided, Stiglitz said the government instead should take an active role—including personnel changes—in getting banks to stop engaging in the types of risky behavior that created the credit crisis.

"If you change the management and you change the incentives, you're going to get better behavior," Stiglitz said in a live interview. "Most of the people in the banking sector are doing their jobs. It's only at the top—the flawed incentive structure, including the flaw resulting from too-big-to-fail--that have gotten us into this mess."

Taxpayers have been put at too much risk because of the bailout programs, Stiglitz said, and that in turn has created fear in the financial markets that public pressure could cause the government to change the rules attached to the plans.

While he agrees the banks should be recapitalized, he said it should be done in a way that protects the integrity of the system and has safeguards that keep the banks from holding the government hostage.

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"We have created wards of the state. The wards of the state are these big banks. They knew that they're too big to fail, they keep telling us that they're too big to fail," Stiglitz said.

"They have even claimed that they're too big to be financially restructured, which is extending the corporate safety net even further. My view is we have to create an economic structure that allows us to wean these corporations off of the corporate safety net."

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