An interesting segment at Tech Ticker with Joseph Stiglitz, the Nobel Prize Winning economist, where he calls for banking reform now…or face another crisis in the future.
Stiglitz is a Keynesian economist. He may be more Keynesian then Keynes himself, but I, along with most Austrian economists, agree with him. To date, nothing has been done to fix the problems that arose in 2008. We still have a system where banks can take as much risk as they want. If they are right, they get fat bonuses, like last year; if they are wrong, then the taxpayers back them up.
The reason for this is we no longer have a distinguishing feature between depository banks and investment banks. Depository banks are where we put our savings whereas investment banks raise capital for companies, governments, and endowments. Investment banks often trade their own portfolio, which is where the problem arises.
This wasn’t an issue until President Clinton, under the advice of Bob Rubin, Larry Summers, and Alan Greenspan, revoked the Glass-Steagall Act, which was crafted in the 1930s to reduce banking risk. Now, Paul Volcker has submitted a plan that is similar to Glass-Steagall and focuses on breaking up the big banks.
Personally, I would rather see Glass-Steagall reinstalled. I don’t agree with Volcker or conventional wisdom that we should limit the size of banks. I don’t have a problem with banks getting big. I just want to ensure that we let them fail if they deserve it. If we keep the big banks from placing risky bets on trades and derivative products, then size doesn’t matter (probably the only time it doesn’t 
).
).It is good to see even the Keynesian gang on board with my views that lean Austrian. This is one of the few areas I agree with folks like Stiglitz.