In praise of Obama's banking proposals

Nobel laureate Stiglitz says curbing the banking industry is a good idea.

By Kim Peterson Jan 29, 2010 1:30PM
Banker © Radius Images/Jupiterimages Nobel Prize-winning economist Joseph Stiglitz says  President Obama's banking proposals are a good start.

The "too big to fail" banks have a reason to gamble, he writes in the Los Angeles Times. If they make money, they keep the profits. If they lose, the government picks up the tab.

As a result, big banks took billions in bailout money while small banks closed. Now the banking system is even more concentrated, he writes.

So what to do? As it stands, he writes, big banks are effectively insured and subsidized by the government. The bank tax that Obama proposed is designed to discourage some of that excessive risk-taking -- but what will likely happen is that banks will force the burden of that tax on shareholders.

Stiglitz supports Obama's other banking proposal, the one that prevents banks from running hedge funds or engaging in proprietary (or "prop") trading. There was never a good justification for banks to do this, he writes.

If big banks want to trade in the derivatives market, they should have to pay for any losses they suffer without turning to the government, Stiglitz writes.

If we allow the big banks to continue operating as they have been, they could once again hold the country hostage in a time of crisis, combining their favorite weapon -- fear -- with their political clout to extract money from the rest of us.


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