Banks crisis: it’s nowhere near over

Almost one year to the day since the collapse of Lehman Brothers triggered the near-meltdown of the financial system - September 15, 2008 - there are new warnings about the health of the world's largest banks.

Joseph Stiglitz, the Nobel Prize-winning economist and member of the White House Council of Economic Advisers said yesterday
the underlying problems have not been fixed. "In the US and many other countries, the too-big-to-fail banks have become even bigger," Stiglitz told Bloomberg, adding for apocalyptic flavour: "The problems are worse than they were in 2007 before the crisis."

Stiglitz is not alone in this view. Former Federal Reserve chairman
Paul Volcker, an advisor to President Obama, also believes financial
institutions should now be discouraged from growing excessively.
In the year since the September 2008 crisis, many of the world's largest banks - shored up with central bank funds - remain unreformed and some, including Lloyds and BNP Paribas, are substantially larger.

Even as politicians consider regulatory reform, the will to curb the size of banks is weak. This is dangerous, Stiglitz warns, because the world economy is "far from being out of the woods" and we could be entering an extended period of economic malaise.

This anxiety is exaggerated by concern over what may happen when the central banks' stimulus programmes are tapped out and they turn off the spigot of cheap money.
 
For G-20 leaders gathering next week in Pittsburgh, the economic signals are difficult to read. Some, including 'Dr Doom', Nouriel Roubini, are warning of a double-dip slump. Inconsistencies abound: sluggish markets, spiking gold prices, a weakening dollar and growing belief that the US may choose a period of inflation to help bring down the value of its stratospheric foreign debt.

And a looming US-China trade war that started last week with chicken, meat and car tyres could escalate into a confrontation in which Beijing decides to flex its economic muscle.

At the same time the mighty US consumer is said to be more optimistic - but not optimistic enough to resume consuming with enthusiasm. Should we be worried?

The US may grow "but not enough to offset the increase in population,” warns Stiglitz. If workers do not have income, "it's very hard to see how the US will generate the demand that the world economy needs." ·