US is paying for failure to nationalise banks: Stiglitz

Nobel Prize-winning economist Joseph Stiglitz said the world’s biggest economy is suffering because of the US government’s failure to nationalise banks during the financial crisis.

“If we had done the right thing, we would be able to have more influence over the banks,” Stiglitz told reporters at an economic conference in Shanghai yesterday.

“They would be lending and the economy would be stronger.”, he added.

Stiglitz has stuck with his view even after the US economy returned to growth in the third quarter and as banks’ share prices climbed this year.

President Barack Obama said on October 24 that the nation’s lenders, supported by taxpayers in the crisis, need to “fulfill their responsibility” by lending to small businesses still struggling to get credit.

Companies such as Citigroup Inc and Bank of America Corp benefited from a $700 billion taxpayer-funded bailout package last year. In contrast, Obama said that too many small businesses are still short of money, adding that his administration will “take every appropriate step” to encourage banks to lend.

“We have this very strange situation today in America where we have given banks hundreds of billions of dollars and the president has to beg the banks to lend and they refuse,” Stiglitz said yesterday. “What we did was the wrong thing. It has weakened the economy and has increased our deficit, making it more difficult for the future.”

While the US economy grew at a 3.5 per cent annual rate in the third quarter, the first expansion in more than a year, the economist said the recession is “nowhere near” its end, citing rising unemployment and weak demand.

The US government plans to alter the way that a similar rescue would be handled in the future. Draft legislation proposes that banks, hedge funds and other financial firms holding more than $10 billion in assets would pay to rescue companies whose collapse would shake the financial system.

Citigroup and Bank of America shares have quadrupled from this year’s lows in March.