Weak regulation and too-big-to-fail financial institutions are weakening the global economy and leading to more inequality and political instability, Nobel prize-winning economist Joseph Stiglitz told CNBC.

"If we allow things to carry on the way they are, we are going to have not only an unbalanced economy, but unbalanced politics, with the financial sector really distorting both our economy and our democracy,” Stiglitz told CNBC.

Stiglitz, who recently authored a book called "The Price of Inequality,’’ said the single most pressing issue facing the global economy was reforming financial markets.

Editor's Note: The Final Turning Predicted for America. See Proof.

Pointing to the Libor-fixing scandal swirling around U.K. banks Barclays and Royal Bank of Scotland, he said both Europe and the global economy will be "weak’’ in five to 10 years if tougher reforms aren’t implemented.

The head of the Bank of England, Mervyn King, meanwhile, told a news conference in London the industry needed "real change’’ in its culture, Reuters reported.

King called for "leadership of an unusually high order and changes to the structure of the industry." He called on parliament to pass legislation as soon as possible.

U.S. and British authorities fined Barclays $453 million Wednesday for manipulating the Libor, and analysts forecast more banks would be cited for collusion, Reuters said.

"We expect this to be a long-term overhang," said Morgan Stanley analyst Chris Manners.

Stiglitz, in his interview with CNBC, called for a "much stronger version’’ of current regulation, that would force the sector to focus on providing credit instead of engaging in speculative investments.

“A lot of inequality, especially at the top, does not come from people really making the size of the pie bigger, making our economy work better, it comes from what we call `rent-seeking’, trying to seize a bigger slice of that pie through things that actually make our economy weaker,” Stiglitz said.

Banks should be told they "can’t engage in these kinds of speculative activities, these non-transparent CDSs , these gambles on the market,’’ said the former chief economist at the World Bank and winner of the 2001 Nobel prize in economics.

He said the 1999 repeal of the U.S. Glass–Steagall Act, which separated investment bank activity from commercial bank activity, was due to lobbying by the financial sector and had weakened the industry and the broader economy.

“That was the influence of the banks again,’’ he said. ``They lost money on a lot of their real financial investments, but their political investments really paid off — not for shareholders and bondholders, but for the bank managers, who have done very well in the last few years,” he said.

“If we continue on the current course, the financial system will not be serving the rest of our economy,’’ said Stiglitz. "Inequality will be greater, and we are paying a very high price for this inequality,’’ according to CNBC.

Editor's Note: The Final Turning Predicted for America. See Proof.