Nobel Prize-winning economist Joseph Stiglitz could be considered a buzz-kill at some Wall Street parties.
"In the U.S. and many other countries, the too-big-to-fail banks have become even bigger," Stiglitz said in an interview today in Paris. "The problems are worse than they were in 2007 before the crisis."
"It’s an outrage," especially "in the U.S. where we poured so much money into the banks," Stiglitz said. "The administration seems very reluctant to do what is necessary. Yes they’ll do something, the question is: Will they do as much as required?"
The problems that Stiglitz is talking about isn't banks going under and people getting laid off. He's talking about the reasons for those layoffs and bankruptcies.
Risk-taking is back on Wall Street in a very big way. The major banks have taken trillions of taxpayer dollars and are now using them to bet heavily on commodity and bond speculation, stocks in bankrupt companies, and exotic derivatives products.
Through mergers and the failure of Lehman Brothers, the mammoth banks whose near-collapse prompted government rescues have gotten even bigger, increasing the risk they pose to the financial system. And they still make bets that, in the aggregate, are worth far more than the capital they have on hand to cover against potential losses.
The government hasn't just watched banks resume their freewheeling ways and prosper. It has been an enabler in the process.
That's what happens when you give massive amounts of money to crooks with no questions asked.
Now some people out there are thinking all that is needed is for an economic turnaround to happen, then everything will be fine. These people need a cold dash of reality.
As of last week, the ABX index of sub-prime mortgage debt showed that AAA-rated securities from early 2007 were trading at 28 cents on the dollar – AA was at 4 cents, near all-time lows. No one can say that $2 trillion (£1.2 trillion) of sub-prime and Alt-A debt is still trading at panic levels, exaggerating losses. The dust has settled. What we can see is that creditors will never recoup their money.
Let's break this down for those eternal optimists. The markets are no longer panicking, thus assets prices aren't being "pushed artificially down". These are real prices, and those real prices are that AAA-rated securities, the highest possible ratings, are still only worth 28 cents on the dollar.
So what is means is that there was never a panic. There was only a justified readjustment of prices to reality. This is reality, folks! These banks are insolvent, the investors have been swindled, and the people we bailed out should be sitting in jail. All our taxpayer dollars did is make the banks liquid again. Their balance sheets are still insolvent.
The saddest thing is that we don't actually need these big banks. The small banks, which are much better run, are growing to fill the void left by the big banks. The problem for these small banks is that the big banks have an unfair advantage because they are backstopped by the taxpayer.
Since the end of Glass-Steagall in 1999, the big banks have moved away from the lending business, and moved into the speculating business. Bailing them out only makes speculation in the economy a bigger problem.