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Banks Risk Distorting Our Democracy: Stiglitz

Friday, 29 Jun 2012 | 8:07 AM ET

Under-regulated and over-powerful banks weaken the global economy and lead to higher inequality, Nobel prize-winning economist Joseph Stiglitz told CNBC.

Joseph Stiglitz
Franco Origlia | Getty Images
Joseph Stiglitz

Highlighting the Libor -fixing scandal that has hit UK banks Barclays and Royal Bank of Scotland , Stiglitz said reforming financial markets was the single most pressing issue facing the global economy.

“A lot of inequality, especially at the top, does not come from people really making the size of the pie bigger, making our economy work better, it comes from what we call rent seeking, trying to seize a bigger slice of that pie through things that actually make our economy weaker,” Stiglitz told CNBC’s 'Worldwide Exchange' on Friday.

Stiglitz said he supported a “much stronger version” of current financial market regulation, with the sector forced to focus on its core purpose of providing credit. He said banks should be told: “You can’t engage in these kinds of speculative activities, these non-transparent CDSs , these gambles on the market — they are not your business.”

He added that over-mighty banks not only distort the economy, but also distort politics. He said the 1999 repeal of the U.S. Glass–Steagall Act, which enforced the separation of investment bank activity from commercial bank activity, was due to lobbying by the financial sector.

“That was the influence of the banks again… They lost money on a lot of their real financial investments, but their political investments really paid off! Not for shareholders and bondholders, but for the bank managers, who have done very well in the last few years,” he said.

Without reform, both Europe and the global economy will be “weak” in five to 10 years’ time, said Stiglitz.

“If we continue on the current course, the financial system will not be serving the rest of our economy, the economy will be weak. Inequality will be greater, and we are paying a very high price for this inequality.

“We could have lower inequality, a more balanced financial system, and higher economic growth. But if we allow things to carry on the way they are, we are going to have not only an unbalanced economy, but unbalanced politics, with the financial sector really distorting both our economy and our democracy,” he said.

Stiglitz is a former chief economist of the World Bank, and won the Nobel Prize in 2001. He has recently written a new book, 'The price of inequality'.

To view Joseph Stiglitz's appearance on CNBC, click here

— By CNBC.com's Katy Barnato

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