THE Obama administration's plan to fix the US banking system is destined to fail because the programmes have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.
'All the ingredients they have so far are weak, and there are several missing ingredients,' Professor Stiglitz said. The people who designed the plans are 'either in the pocket of the banks or they're incompetent'.
The Troubled Asset Relief Program, or TARP, isn't large enough to recapitalise the banking system, and the administration hasn't been direct in addressing that shortfall, he said. Prof Stiglitz said there are conflicts of interest at the White House because some of Mr Obama's advisers have close ties to Wall Street.
'We don't have enough money, they don't want to go back to Congress, and they don't want to do it in an open way and they don't want to get control' of the banks, a set of constraints that will guarantee failure, Prof Stiglitz said.
The return to taxpayers from the TARP is as low as 25 cents on the US dollar, he said. 'The bank restructuring has been an absolute mess.'
Rather than continually buying small stakes in banks, weaker banks should be put through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said.
Prof Stiglitz, 66, won the Nobel in 2001 for showing that markets are inefficient when all parties in a transaction don't have equal access to critical information, which is most of the time. The Public-Private Investment Program, PPIP, designed to buy bad assets from banks, 'is a really bad programme', Prof Stiglitz said. It won't accomplish the administration's goal of establishing a price for illiquid assets clogging banks' balance sheets, and instead will enrich investors while sticking taxpayers with huge losses. 'You're really bailing out the shareholders and the bondholders,' he said. 'Some of the people likely to be involved in this, like Pimco, are big bondholders,' he said, referring to Pacific Investment Management Co, a bond investment firm in Newport Beach, California. -- Bloomberg