Joseph Stiglitz: Too-Big-to-Fail Banks

“We need to recognize that our financial sector didn’t do what it was supposed to do, which is allocate capital, manage risk, and do it at low transaction cost. They did it at a huge transaction cost—40 percent in one year in the United States of all corporate profits were in the financial sector. A competitive financial sector should be a small sector. It’s a means to an end, not an end in itself. So we forgot those basic lessons,” says Nobel Laureate Joseph Stiglitz. “But the problems of incentives occur not just at the individual level, but also at the organizational level. If you have banks that are too big to fail, they know that if they gamble and they win, they walk off with the profits. If they lose, the taxpayer picks up the losses.” This Carnegie Council event took place on September 21, 2009. For the full video, audio, and transcript, go to www.cceia.org