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Freefall [Hardcover]

Joseph E Stiglitz
5.0 out of 5 stars  See all reviews (2 customer reviews)
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Book Description

Dec 22 2009

Nobel Prize winner Joseph E. Stiglitz explains the current financial crisis—and the coming global economic order.

The current global financial crisis carries a "made-in-America" label. In this forthright and incisive book, Nobel Laureate Joseph E. Stiglitz explains how America exported bad economics, bad policies, and bad behavior to the rest of the world, only to cobble together a haphazard and ineffective response when the markets finally seized up. Drawing on his academic expertise, his years spent shaping policy in the Clinton administration and at the World Bank, and his more recent role as head of a UN commission charged with reforming the global financial system, Stiglitz outlines a way forward building on ideas that he has championed his entire career: restoring the balance between markets and government, addressing the inequalities of the global financial system, and demanding more good ideas (and less ideology) from economists.

Freefall is an instant classic, combining an enthralling whodunit account of the current crisis with a bracing discussion of the broader economic issues at stake.


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[W]hat brings this book to life is his formidable grasp of economic policy and strong sense of conviction about the blunders that have been made, especially with respect to the bank bailouts. --Jim Zarroli, NPR business reporter ""What We're Reading" ""

About the Author

Winner of the 2001 Nobel Prize in Economics, Joseph E. Stiglitz of Columbia University is the author of Making Globalization Work and Globalization and Its Discontents.


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10 of 10 people found the following review helpful
5.0 out of 5 stars Nobel Laureate's Winning Prescription April 25 2010
By Ian Robertson TOP 100 REVIEWER
Format:Hardcover
If you read one book about the causes, effects, and remedies for the recent financial crisis, make it this one. Nobel prize winning economist Joseph Stiglitz's book is cohesive, packed with information, insight and experience, and clear on the direction forward. The author is unabashedly from the centre-left of the economic/political spectrum (think Volker and Krugman), and he criticizes America's conservative ideals, its foreign and domestic policy, and its peculiar style of capitalism in the thoughtful, principles based logic one expects from a leading economist.

Stiglitz's tenure as World Bank chief economist during the 1997 Asian crisis gave him particular insight into the causes and the global response, and he draws on this experience and others in supporting some of his arguments about the current crisis. He also references many other past crises and bubbles, occasionally dragging economic theory into his explanations, but in plain english and only to provide context or to illustrate how the economic assumptions were flawed. The historical references, when combined with his critique of the past few decades of deregulation and of the Chicago school economists, make a compelling case.

Only two people suffer Stiglitz's unrelenting criticism: Alan Greenspan and Milton Friedman. For example, Stiglitz is very critical of Greenspan's low interest rate policies, and takes him to task for his comment that over the past decade homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages. While this is obviously true in any declining interest rate environment, Stiglitz asks how good this advice could possibly be when current rates were at all time lows.
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4 of 4 people found the following review helpful
5.0 out of 5 stars Clear-cut Analysis at its Best! May 16 2010
By Ian Gordon Malcomson HALL OF FAME TOP 50 REVIEWER
Format:Hardcover
With "Freefall", the award-winning macroeconomist Joseph Stiglitz has provided his readers with an easy-to-follow explanation of how the US has come to lead the world to the brink of economic disaster. While the main cause can be found in its desire to adopt financial deregulation as its road to prosperity, the long-term fallout proves more difficult to understand. To start with, the book examines the lead-up to the 2008 Recession. Here, he argues that by choosing to eliminate or de-emphasize the need for government oversight in domestic financial markets, the American government has created a two-fold problem. It has not only seriously destabilized its own economy by destroying reliable credit surces but 'exported' a similar questionable philosophy to the rest of the world. Essentially, this arrogant view amounts to aasuming that bankers have the freedom to manipulate the risk factor with impunity by designing any investment opportunities they want. Wall Street has led the way with its so-called sophisticated computerized models that have created a whole new world of exciting but risky and crazy investment opportunities. This book quickly moves from being a study of how and why Wall Street and Washington got us into this mess in the first place to pusuing a number of troubling issues stemming from their efforts to fix it. It is Stiglitz's view that big government has not seized the bull by the horns in trying to reassert a pre-1980 semblance of control over money markets. His criticism of bailout or stimulus plans such as TARP and TALF comes to one solemn conclusion. They are too small to make a lick of difference in respect to GDP. The 'too-big-to-fall' mentality still pervades Wall Street as it can virtually write its own terms of repayment while making big profits into the bargain. Read more ›
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Amazon.com: 4.0 out of 5 stars  114 reviews
463 of 490 people found the following review helpful
5.0 out of 5 stars Excellent and Credible Insights! Jan. 5 2010
By Loyd E. Eskildson - Published on Amazon.com
Format:Hardcover
Stiglitz believes that markets lie at the heart of every successful economy, but do not work well without government regulation. In "Freefall" he explains how flawed perspectives and incentives lead to the 'Great Recession' of 2008, and brought mistakes that will prolong the downturn.

Between 1996-2006, Americans used over $2 trillion in home equity (HELOC) to pay for home improvements, cars, medical bills, etc., largely because real income had been stagnant since the early 1990s. Economic recovery requires that we repay the remainder of these amounts, overcome stock market losses (10% between 2000-2009), the loss of some 10 million jobs, and reductions in credit card balances, and find an equivalent amount to the former home-equity sourced financing ($975 billion in 2006 alone - about 7% of GDP) to finance another consumer-driven GDP upturn - without the prior boom in housing and commercial building. Stiglitz also points out that the Great Depression coincided with the decline of U.S. agriculture (crop prices were falling before the 1929 crash), and economic growth resumed only after the New Deal and WWII. Similarly, today's recovery from the Great Recession is also hampered by the concomitant shift from manufacturing to services, continued automation and globalization, taxes that have become less progressive (shifting money from those who would spend to those who haven't), and new accounting regulations that discourage mortgage renegotiation.

Stiglitz is particularly critical of the U.S. finance industry - its size (41% of corporate profits in 2007), avarice (maximizing revenues through repeated high fees generated by over-eager and over-sold homeowners needing to refinance adjustable-rate mortgages that repeatedly reset), and 'sophisticated ignorance' (using complex computer models to evaluate risk that failed to account for high correlation within and between housing markets; 'eliminating risk' through buying credit default swaps from AIG - blind to the likelihood AIG could not make good in a housing downturn), and excessive risk (banks leveraged up to 40:1 with increasingly risky mortgage assets - 'liar's loans,' 2nd mortgages, ARMs, no-down-payments; taking advantage of the 'too-big-to-fail' and 'Greenspan/Bernanke put' phenomena). Much of this behavior was driven by lopsided personal financial incentives (bonuses) - if bankers win, they walk off with the proceeds, and if they lose, taxpayers pick up the tab. However, to be fair, any firm that failed to take advantage of every opportunity to boost its earnings and stock price faced the threat of a hostile takeover.

The impact of mortgage defaults is greater than one would otherwise expect because financial wizards found that the highest tranches of securitized mortgages would still earn a AAA rating if some income was provided to the lowest tranches in the 'highly unlikely' event of eg. a 50% overall default, thus boosting the ratings and saleability of lower tranches. (Fortunately for the U.S., many of these mortgages ended up overseas, spreading the disaster.) Another problem is that mortgage speculators make more profit from foreclosure than partial settlements. Meanwhile, investors worried that mortgage servicers might be too soft on borrowers required restrictions that make renegotiation more difficult and lead to more foreclosures. Similarly, those with 2nd-mortgages often found that those holding the second were unwilling to accept a principal write-down as their share of assets would be wiped out. Finally, new government regulations aimed at making banks seem healthier than otherwise allowed changing from 'mark-to-market' valuation of mortgages to long-term 'mark-to-hope' valuation - thus, writing down assets in a renegotiation would generate the very mortgage write-downs the new regulations avoided, and thus increased bank reluctance to do so.

"Freefall" also does an excellent job refuting many of the simple explanations, alibis, and remedies for the 2008 Great Recession. For example, Greenspan's 'nothing he could do' alibi is countered by Stiglitz's 'require higher down payments or margin requirements' (or increase interest rates). To those blaming Community Reinvestment Act requirements for increased mortgages to those with low incomes, Stiglitz says the default rates on those loans was less than in other areas; as for Fannie and Freddie being responsible, they came late into the sub-prime game. Responding to claims that increased regulation would stifle innovation and its role in economic growth, Stiglitz asserts that it is impossible to trace any sustained economic growth to those 'innovative' mortgages. (A 'real' contribution could have been made by less profitable innovative mortgages that helped homeowners stay in their homes.) On the other hand, he also admits that just giving more regulatory power to the Federal Reserve is not a solution - the Federal Reserve didn't use what it did have prior to late 2008; similarly, the SEC boosted leverage limits from 12:1 to 30:1 and higher in 2004 - exactly the wrong move. Banks suggest banning short sales in the future as a preventive measure - Stiglitz, however, points out that the incentive provided short-sellers to discover fraud and reckless lending may actually play a more important role in curbing bad bank behavior than government regulators have.

Other factors, especially government actions, also receive attention from the author. Overall, global supply exceeds demand - thus, the recovery focus needs to be on boosting demand. Stiglitz points out that growing inequality shifts money from those who would have spent it to those who didn't - weakening overall consumer demand. High oil prices have also impacted most those with low incomes, and probably encouraged Greenspan to hold down interest rates to counteract the negative impact. On a broader level, Stiglitz contends that IMF encouragement of national self-discipline and 'rainy-day' funds also weaken consumer demand. As for recommendations for more tax cuts and rebates, Stiglitz says these won't have much impact on consumers saddled with debt and anxiety, and as long as there's excess capacity, businesses will be reluctant to invest (Laffer's supply-curve tax-curve is an irrelevant theory, at best). Stiglitz even suggests elsewhere that the failure of Bush's 2001 tax cuts to stimulate the economy may have also influenced Greenspan to hold down interest rates for too long.

AIG, once bailed out, paid off billions to Goldman Sachs at 100% (Secretary Paulson's former firm), while defunct credit-default-swaps elsewhere were settled at only 13 cents on the dollar, says Stiglitz. Overall, he is very negative on the financial-sector bailout (TARP), believing that the money would much better have been used to capitalize new banks at 12:1 leverage, or not spent at all. The resulting bank subsidies were unfair to taxpayers (Treasury put up most of the money and got short-changed on potential benefits), and implementation was inconsistent - some institutions and stockholders were bailed out, others were not. (The reason lending 'froze up' is that banks didn't know whether they or their peers ere underwater.) The stimulus package, on the other hand, was too small (aimed at 3.6 million jobs, vs. 10 million lost plus 1.5 million new workers/year needing jobs), and was delegated to Congress without clear guidance. The result was a failure to provide mortgage insurance for those losing jobs, while instead creating the 'cash-for-clunkers' (mostly just moved sales from one period to another - [...] estimated only 18% were added sales, costing taxpayers $24,000 apiece; eight of the top ten purchases came from Asian manufacturers), ineffectual tax cuts, putting money into a failing auto industry, and increased road construction (greater global warming) instead of giving even more money to high-speed rail. The stimulus emphasis should have been on fast implementation, high-multiplier impact, and addressing long-term problems (eg. global warming). The employment situation now is worse than just the unemployment rate suggests - there are a record 6 applicants for every opening, the average work week is at 34 hours - the lowest since data was first collected in 1964, many have turned to disability instead of unemployment and are not counted.

Overall, Stiglitz believes there is far too much short-term thinking driving decision-makers, that business lobbies are too strong, and that markets are not naturally efficient. (Other inefficient market areas besides finance include health care, energy, manufacturing.) Meanwhile, we have done nothing to correct the underlying problems (big banks are even bigger) and Stiglitz also fears (reported elsewhere) the U.S. economy faces a "significant chance" of contracting again.

Interesting side-notes: 1)Stiglitz suggests that banks 'too-big-to-fail' should pay higher rates of deposit insurance, and incur restraints on executive incentives. In 1995 our five largest banks' market share was 11%, 40% now. Regardless, the world's largest three banks are now Chinese - #5 is American. (Not to worry - scale economics are no longer a factor for any of those banks, says Stiglitz.) 2)President Reagan made a major mistake in removing Paul Volcker as Chairman of the Federal Reserve Board and appointing Alan Greenspan in his place. Volcker had brought down inflation from more than 11 percent to under 4 percent, which should have assured his reappointment. But Volcker believed financial markets need to be regulated, and Reagan wanted someone who did not. Thus, Stiglitz believes regulations must be mandated, and enforced by a neutral, not political, source. 3)Repealing the Glass-Steagall Act in 1999 changed the culture of banking from conservative to high-risk, and also encouraged even larger institutions. 4)It is ironic that the Bush/Greenspan efforts to minimize government involvement in the economy resulted in our becoming de facto owners of the world's largest auto and insurance companies, and some of the largest banks. 5)Stock options are doubly damaging - they undermine stockholder wealth while remaining largely hidden from stockholders, and they encourage maximum short-term accounting manipulation to move stock prices up. 6)The U.S. national debt will reach 70% of GDP by 2019, and when it hits 90%, paying 5% interest on that debt will consume one-fifth of federal taxes.

Bottom-Line: Most books on current economic issues written for the public are superficial, or even worse, mere demagoguery. Stiglitz's qualifications - Nobel prize-winner in economics (2001), former Chairman of the President's Council of Economic Advisors (1995-97), and former World Bank Chief Economist help provide an important, interesting and credible alternative. "Freefall" was a pleasure to read.
61 of 67 people found the following review helpful
5.0 out of 5 stars Economics 101 Feb. 2 2010
By W. P. Strange - Published on Amazon.com
Format:Hardcover
I admit that economics confuses me, so when I read a book written in lucid easy to understand language I can begin to understand a compound-complex idea a little more clearly. Nothing in economics is as it seems because politics can often obfuscate with ideological explanations that are neither simple or even partially true when based on politics. Stiglitz doesn't say that the free market can't work, but that it isn't the entire answer. Regulations, as the banking meltdown of 2009 demonstrates, are necessary to prevent greed from becoming the dominating motivation for Wall Street and big banks, especially investment banks that measure success only in terms of how big their next bonus will be.

"Freefall" doesn't give us all the answers, and again I admit that I still have questions, but for a basic understanding of the markets as they played out in the past couple of years and how deregulation merely increased the problems for most of Main sreet this is a very good place to start. Some critics have already panned this book as a call to socialism, but those critics obviously lack even a basic understanding of what socialism really is and are only looking for a buzz word to sustain the belief that a totally "Free Market" system is the only good thing, when in fact it increases the chances of boom and bust cycles coming even closer together in the future. To begin, modest regulations are all that might be needed, and if bankers once again act trustworthy and preform ethically it could be enough. If greed continues unabated, then the middle class will disappear and only the wealthiest will profit.
19 of 21 people found the following review helpful
4.0 out of 5 stars Pulls no punches April 15 2010
By Andrew Berschauer - Published on Amazon.com
Format:Hardcover
With Freefall, Joseph Stiglitz presents a thoroughly argued - although at times convoluted - exposé on the downfall of the global economy and (he clearly hopes) the discrediting of the "markets can do no wrong" school of economic thought. I'm not an economist, and am not qualified to comment on the academics presented here, but the fact that no one emerges unscathed from this book gives me a degree of confidence that Mr Stiglitz has produced a well-balanced work focussed on outcomes rather than party platforms.

Many of the 1-star reviews harp on about Mr Stiglitz's wanting to give the government more power when the Fed and others were culpable in the Great Recession. At best that interpretation does a disservice to what Mr Stiglitz advocates. Yes, he calls for a balanced role for government involvement to keep markets in line (as, he argues, they have clearly demonstrated they cannot do it themselves), but he also takes regulators and the Fed to the mat for their poor oversight, and the Obama administration for poor choices of remedy (basically just continuing the failed policies of GW Bush). Mr Stiglitz goes further, though, in calling for a restructuring of the financial sector - from the ashes, a phoenix - saying that today's incentives produce bad behavior, and need to be rethought with "right" outcomes in mind. It's an admirable goal, but where the political will for this comes from is anybody's guess. If Obama couldn't part ways with GW Bush on this matter, how will he restructure finance? One reviewer laments the lack of moral outrage expressed by the author - did he read the book? It's full of moral outrage and condemnation of a system which has failed everyone except the heads of the financial sector.

I agree with a few thoughts from the 1-star reviews: Freefall tends to wander from topic to topic, and gets very repetitious. The final chapter is like reading a sermon - demanding we be, perhaps, unrealistically moral. Also, 1-star reviewers unfairly complain there are no remedies shared in the book - there are plenty (e.g., implementing a Global Reserve Currency at one end of "the possible" and Reinventing Economics at the other), but they are a) thinly distributed throughout the book (so easy to forget they're there), and b) sometimes so grand in scope and vision as to be almost meaningless in today's political reality.

At the end of the day, I found Freefall to be harshly (yet fairly) illuminating in the origins of the Great Recession, the shortcomings of the system and its actors in the market and in the government, and the fact that something good can emerge from this mess. It is clear that major changes are needed, and equally clear that there is good reason to be skeptical that necessary change is achievable. We live in a different, more interconnected global economy than when the current rules were created; Mr Stiglitz convincingly argues that a new way of managing this economy - even a new way for how we think about the economy - is mandatory. How we get from here to there, however, is anything but clear.
39 of 47 people found the following review helpful
5.0 out of 5 stars Speaking Truth to Power -- Again Jan. 31 2010
By JB Kemble - Published on Amazon.com
Format:Hardcover|Verified Purchase
Professor Stiglitz has repeatedly spoken truth to power. He wrote about the perils of unchecked globalization, the disaster of the Federal Reserves policies in the 90s and 00s, the wrong-footed solutions to the Asia crisis, and the cost of the Iraq War. Here he lays out in simple, straightforward jargon-free language, what happened to cause the worst economic crisis since the Depression and what steps we need to take to prevent it from happening again. Highly recommended.
176 of 226 people found the following review helpful
3.0 out of 5 stars Why only three stars? Feb. 11 2010
By Dan Heath - Published on Amazon.com
Format:Hardcover
Professor Stiglitz's account of the causes of the financial crisis is lucid, and his advice regarding the need for regulation of banks and other financial institutions is sound. Stiglitz is an unapologetic man of the left, but his book is more balanced than many which have addressed this issue from the right. (E.g., Thomas Sowell's "The Housing Boom and Bust".)

Moreover, he grounds his book in a clear exposition of why advocacy for unfettered free markets does not duly consider imperfect competition (monopolies), externalities, irrationality, and asymmetric information, the subject for which he earned the 2001 Nobel Prize for economics.

So why do I give this book only three stars?

When I was an economics student in the 1960's, we learned our Keynes, and then we learned our Keynes, and then we learned our Keynes again. Over the next forty-odd years, as my knowledge of economics became antiquated, new problems arose and new theories were advanced to grapple with them, but I didn't have the time to study them. In the months after September, 2008, I devoted myself to relearning macroeconomics, which for me meant revisiting Keynes. With that basis, I couldn't fathom the ideas of the Chicago school...Lucas, Cochrane, Barro (although he is at Harvard), and others. Still, I came to some understanding of, if not agreement with, their ideas.

Stiglitz is harshly critical of their work, pointing out that their elegant mathematical models are highly constrained by assumptions that most of us would find unrealistic, and that they reach conclusions (such as that unemployment can't exist) that are absurd.

He further asserts that his own equally elegant mathematical models show the fallacies in the Chicago school's arguments. For example, he states that while they would grant that asymmetric information exists, they claim their models are "close enough", while his work shows that even small doses of imperfect information are sufficient to distort the operation of free markets to such a degree that efficient outcomes can hardly be assured. Thus, government intervention is required to produce better results.

The problem is that Siglitz does not offer the reader proof. It is true that this is because most readers (including myself) could not follow the mathematics involved, but based on the scanty evidence he provides, one cannot help being a bit skeptical. To wit:

1. He belittles the ideas of his opponents, but what arguments would they offer in rebuttal?

2. All economic models are approximations of reality. Are his opponents' actual policy recommendations as far out as he claims, or is he merely using their models as straw men?

3. Are we to believe that government policy makers are any more capable of producing economically efficient outcomes? As human beings, are they not also subject to the perils of externalities, irrationality, asymmetric information, and even (in the case of government enterprises) monopoly exploitation?

4. When Stiglitz broadens his recommendations beyond the nuts and bolts of banking reforms, he seems to launch into yet another vain sermon advocating the perfectibility of humankind. Is that sound economic analysis or merely an expression of his hopes and dreams?

After reading the book, I don't know the answers to such questions. It may well be that Professor Stiglitz has an irrefutable case for both his diagnosis and his cures, but he asks the reader to accept too much based solely on his claims to wisdom.
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