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'."
More...
