Officials in Davos should try to reach a global consensus about the need for a new regulatory regime for banks, Nobel Prize laureate Joseph Stiglitz told CNBC Friday.
Photo: World Economic Forum
Davos, Switzerland
Banks threaten to move to another location as soon as new taxes or regulation are announced, so the main problems that led to the financial crisis are not addressed, Stiglitz explained.
"If there was a broad consensus… this could stop this race to the bottom which got us into the mess we're in now," he said.
Bankers have incentives to take risk and one way to restrain them would be limiting the leverage that banks can have, according to Stiglitz.
"When they win they walk off with the profits, when they lose the taxpayer pays," he pointed out. "We really need to go more directly at these issues like incentives."
Regulatory authorities must be independent from political influence, but the government must set the rules, with the aid of experts, Stiglitz said.
Critics of increased regulation for banks said this would stifle innovation, but Stiglitz argued that it is difficult to see how the innovative banking products in the past 10 years helped society.
"You ask what was the social value of the CDO squares? They were doing things we should have known were stupid," he said.
A CDO square is a derivative where a collaterlized debt obligation is used to invest in other collateralized debt obligations.
Some analysts laid the blame for the crisis at the door of the Federal Reserve, which has left interest rates too low for too long after the dot-com bubble bust in 2000 and the terrorist attacks on Sept. 11, 2001.
But Stiglitz said that if financial institutions had allocated the resulting abundant liquidity to jobs and investment, the economy would be in much better shape now.
"We've had periods in which we've had low interest rates in which we've not had bubbles," he said.
