Bank licences to NBFCs risky; focus on growth : Stiglitz

Speaking to CNBC-TV18's Latha Venkatesh at the sidelines of a RBI meet, Nobel Prize-winning economist Joseph Stiglitz argued about the infirmities of markets and pleaded for a less iniquitous society, especially in the US where middle-class was redefined by raising its earning levels to USD 400,000.

Stiglitz also discussed the recovery in the US and in Europe, the problems of inflation and dampened growth in India and the granting of giving bank licences to corporate houses. Below is an edited transcript of the interview on CNBC-TV18 Q: The Fiscal Cliff Bill defined the middle class with earnings of USD 400,000-450,000 per couple. What impact do you think this will have? Will this postpone US recovery?
A: This was only one part of a bigger set of issues regarding the fiscal cliff. The country right now needs another round of stimulus. The economy is weak. Even before the fiscal cliff issues rose, people did not anticipate growth to be robust enough to bring down the unemployment rate significantly. What the package that has been agreed to now, has both a short-term and a long-term implication.
For the short-term, it means that there will be more money spent than there would have been, a more stringent number have been chosen. For the long-term, I think there is a broad sense that the country needs a larger public sector.
We need investments in infrastructure, education, technology and to balance our books we will need to raise taxes on the middle class, maybe not a lot, but to enshrine or to make permanent, the tax cut for the USD 250,000-400,000 bracket was almost surely a mistake. Q: There has been some kind of improvement in the housing market and the GDP has risen above 3-3.5 percent in some quarters of 2012. Do you think this recovery will be sustained or do you think the economy will sink deeper into the recession in 2013?
A: What happens in 2013 would depend very much on what happens in Congress. I have always maintained that the US economy was not set for a robust recovery but for growth of 2-2.5 percent. Most forecasts are now coming down to the low-2 percent, but the way the economy is progressing has increased the level of uncertainty and it is more likely that growth will be at the lower-end - even below 2 percent.
The government did not renew the cut in Payroll Tax and that, most people believe, will take a substantial amount of 'oomph' out of the economy. So that by itself was, I think, a mistake. Q: Many central banks have shifted focus from targeting inflation to stimulating growth. Do you think there is going to be a period of inflation probably later on in 2013?
A: No, I do not. The excess capacity is too large. Of course, there can be some supply-side driven inflation related to commodities, to particular shortfalls perhaps in certain types of food. But the broad macro-economic picture from a global point of view, is one of continued weakness. Q: Do you think India should ignore inflation to some extent?
A: I do not think one should ignore inflation, but I think it is a mistake to focus single-mindedly on inflation. I think one always ought to be striving for balance and the nature of the balance depends on the particular configuration. For the United States, it is clear that targeting inflation was a mistake. Long before the crisis, before 2008, the issue should have been financial stability.
Now it is employment. But inflation has not been an issue for a quarter of a century. For India, it is more difficult because growth is slowing, but I do not think one needs to worry about even a 7-percent inflation level as long as it is steady, not accelerating and as long as the major sources are particular sectors where the focus of attention should be to addressing those sectoral problems for which monetary policy is a very blunt instrument. Q: What about Europe? Is the worst perhaps over? Will Europe will find its way out and not be on the brink of break-up in 2013?
A: I think it will probably remain at the brink and sometimes closer than others regions, but the fundamental issue remains. Spain and Greece are in depression and help from Europe is not forthcoming.
The question is how long the citizens of these countries be content with an economic structure that results in more than one out of two of the young people being unemployed. To me, that would seem unacceptable and I think to an increasingly large fraction of the populations in these countries, it is unacceptable. While Draghi maybe doing some things for protecting the financial markets, the real question is what is he doing to employment and growth? Q: You have gone on record to state that the derivative market has certainly not served any social purpose. Countries like India have tried to start concepts like credit default swaps (CDS) which have not taken off. Would you advise India not go down the derivatives path?
A: I think one should be very careful. I think the benefits have to be weighed against the costs. Chairman of the Federal Reserve Board Paul Volcker who is no radical has said that none of the financial innovations have led to a faster economic growth or better performance. Instead, they have led to more instability.
So I think that there are uses for particular kinds of insurance products, when they really are insurance. Most of these products are not insurance products, they are speculation, gambling. They have moved Las Vegas into Wall Street and that means that Wall Street is not doing what it is supposed to be doing. Q: In India there is now a move to issue bank licenses perhaps to corporate houses controlled largely by families but identifiable by groups of promoters. Is it a good idea?
A: I think it is very risky. We do not allow it in the United States. I think it is right that we do not allow it. I think the conflicts of interests that open up are sufficiently great. I do not believe that regulators will be able to circumscribe them easily or at all. So I think that the financial sector is important and so is banking is important.
But we have seen the dangers of excess risk-taking, pervasive conflicts of interest in United States and we did not even have this problem. I hate to think what things would have been like if we had that, on top of all of the other problems, in the financial sector.