The Great Recession, as it has come to be called, has impacted more people worldwide than any crisis since the Great Depression. Flawed government policy and unscrupulous personal and corporate behavior in the United States created the current financial meltdown, which was exported across the globe with devastating consequences. The crisis has sparked an essential debate about America's economic missteps, the soundness of this country's economy, and even the appropriate shape of a capitalist system. Few are more qualified to comment during this turbulent time than Joseph E. Stiglitz. Winner of the 2001 Nobel Prize in Economics, Stiglitz is "an insanely great economist, in ways you can't really appreciate unless you're deep into the field" (Paul Krugman, New York Times). In Freefall, Stiglitz traces the origins of the Great Recession, eschewing easy answers and demolishing the contention that America needs more billion-dollar bailouts and free passes to those "too big to fail," while also outlining the alternatives and revealing that even now there are choices ahead that can make a difference. The system is broken, and we can only fix it by examining the underlying theories that have led us into this new "bubble capitalism." Ranging across a host of topics that bear on the crisis, Stiglitz argues convincingly for a restoration of the balance between government and markets. America as a nation faces huge challenges--in health care, energy, the environment, education, and manufacturing--and Stiglitz penetratingly addresses each in light of the newly emerging global economic order. An ongoing war of ideas over the most effective type of capitalist system, as well as a rebalancing of global economic power, is shaping that order. The battle may finally give the lie to theories of a "rational" market or to the view that America's global economic dominance is inevitable and unassailable. For anyone watching with indignation while a reckless Wall Street destroyed homes, educations, and jobs; while the government took half-steps hoping for a "just-enough" recovery; and while bankers fell all over themselves claiming not to have seen what was coming, then sought government bailouts while resisting regulation that would make future crises less likely, Freefall offers a clear accounting of why so many Americans feel disillusioned today and how we can realize a prosperous economy and a moral society for the future.
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Stiglitz is the world's leading scholarly expert on market failure, and this crisis vindicates his life's work. There have been other broad-spectrum books on the genesis and dynamics of the collapse, but Freefall is the most comprehensive to date, grounded in both theory and factual detail.... the definitive critique to date of how the Summers-Geithner strategy fails, both as economics and as politics.... The tone of this book is good-humored and public-minded. --Robert Kuttner
About the Author
Winner of the 2001 Nobel Memorial Prize for Economics, Joseph E. Stiglitz is the author of Making Globalization Work; Globalization and Its Discontents; and, with Linda Bilmes, The Three Trillion Dollar War. He was chairman of President Clinton's Council of Economic Advisers and served as senior vice president and chief economist at the World Bank. He teaches at Columbia University and lives in New York City. Reader of over four hundred audiobooks, Dick Hill has won three coveted Audie Awards and been nominated numerous times. He is also the recipient of several AudioFile Earphones Awards. AudioFile includes Dick on their prestigious list of Golden Voices.
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10 of 10 people found the following review helpful
By Ian Robertson
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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. (In Greenspan's defence, he maintained in an interview that that particular quote is taken out of context, and that he never recommended homebuyers adopt this strategy, but was just pointing out a fact). In any case, the practice and theory of Greenspan's reign and Friedman's teachings are methodically dismantled.
Stiglitz covers an incredible amount of ground. Like fellow economist Richard Thaler (see his excellent book "Nudge"), Stiglitz focusses on the incentives that drive behaviour, though in this case it's both micro and macro-economic behaviour - the behaviour of individuals, corporations and nations - and he consistently links the incentives back to the type of society they produce. Two examples illustrate.
First, with respect to the recent crisis, he shows why some policies adopted by the Bush and Obama administration provide the wrong incentives, either helping the banks at the expense of homeowners, or failing to help homeowners at all, and he makes specific alternative recommendations. Another example he cites is the inequity in homeowners' mortgage deductability - a longstanding policy with the laudable goal of making homeownership more affordable - but one which gives wealthy homeowners a bigger break due to the progressive tax rates at a time when it's the lower income homeowners who are most in trouble. Stiglitz proposes a similar system, but based on tax credits which would give all the same type of break, with the total cost to government coffers remaining constant, but the excess subsidy to large mortgages shifting to help more people with smaller mortgages. He's bang on the money with this suggestion. The policy should help as many people as realistically possible afford their own homes; it shouldn't help people afford as large a home as possible.
Second, in explaining the flawed thinking behind the incredible rise in popularity of tailor-made derivative products used to hedge and speculate on risk, Stiglitz's logic is unassailable. "Those buying corporate bonds wanted to off-load the risk of the firm going bankrupt. ... If you want to buy a bond without credit risk, then you should buy a government bond of comparable maturity. ... Anyone buying a ten-year bond in a company is, by assumption, engaged in making a credit assessment, judging whether the interest rate paid in excess of the ten-year government rate suffices to compensate for the extra risk of default." Stiglitz offers three possible explanations for derivatives' rise: fees, regulatory arbitrage (the derivative market was very loosely regulated), and speculation (everyone assumed they were smarter than the other side of the derivative bet, and therefore made the bet). Stiglitz's solution to the derivative problem? Like fellow economist Robert Shiller, he doesn't want to ban them. Instead, he proposes full transparency, effictive competition, and enough "margin" to ensure that those betting can fulfill their side of the deal, and most importantly, derivatives should not be allowed to put the entire finnacial system at risk. He then elaborates on how the reform might work; the interests of the bankers, investors, and regulators; the obstacles to its success; and the probable impact of its failed implementation. All this in three pages.
The book's 300 pages are similarly concise, insightful, prescriptive, cautionary, and sobering. Investment professionals, regulators, politicians and voters around the world should read this book.
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. (In Greenspan's defence, he maintained in an interview that that particular quote is taken out of context, and that he never recommended homebuyers adopt this strategy, but was just pointing out a fact). In any case, the practice and theory of Greenspan's reign and Friedman's teachings are methodically dismantled.
Stiglitz covers an incredible amount of ground. Like fellow economist Richard Thaler (see his excellent book "Nudge"), Stiglitz focusses on the incentives that drive behaviour, though in this case it's both micro and macro-economic behaviour - the behaviour of individuals, corporations and nations - and he consistently links the incentives back to the type of society they produce. Two examples illustrate.
First, with respect to the recent crisis, he shows why some policies adopted by the Bush and Obama administration provide the wrong incentives, either helping the banks at the expense of homeowners, or failing to help homeowners at all, and he makes specific alternative recommendations. Another example he cites is the inequity in homeowners' mortgage deductability - a longstanding policy with the laudable goal of making homeownership more affordable - but one which gives wealthy homeowners a bigger break due to the progressive tax rates at a time when it's the lower income homeowners who are most in trouble. Stiglitz proposes a similar system, but based on tax credits which would give all the same type of break, with the total cost to government coffers remaining constant, but the excess subsidy to large mortgages shifting to help more people with smaller mortgages. He's bang on the money with this suggestion. The policy should help as many people as realistically possible afford their own homes; it shouldn't help people afford as large a home as possible.
Second, in explaining the flawed thinking behind the incredible rise in popularity of tailor-made derivative products used to hedge and speculate on risk, Stiglitz's logic is unassailable. "Those buying corporate bonds wanted to off-load the risk of the firm going bankrupt. ... If you want to buy a bond without credit risk, then you should buy a government bond of comparable maturity. ... Anyone buying a ten-year bond in a company is, by assumption, engaged in making a credit assessment, judging whether the interest rate paid in excess of the ten-year government rate suffices to compensate for the extra risk of default." Stiglitz offers three possible explanations for derivatives' rise: fees, regulatory arbitrage (the derivative market was very loosely regulated), and speculation (everyone assumed they were smarter than the other side of the derivative bet, and therefore made the bet). Stiglitz's solution to the derivative problem? Like fellow economist Robert Shiller, he doesn't want to ban them. Instead, he proposes full transparency, effictive competition, and enough "margin" to ensure that those betting can fulfill their side of the deal, and most importantly, derivatives should not be allowed to put the entire finnacial system at risk. He then elaborates on how the reform might work; the interests of the bankers, investors, and regulators; the obstacles to its success; and the probable impact of its failed implementation. All this in three pages.
The book's 300 pages are similarly concise, insightful, prescriptive, cautionary, and sobering. Investment professionals, regulators, politicians and voters around the world should read this book.
4 of 4 people found the following review helpful
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. This sector has convinced Washington that it needs to download its toxic assets on the backs of overburdened taxpayers if it is to be still considered the bastion of American capitalism. Stiglitz warns that this policy of getting a corporate free lunch has deadly implications for the overall economy long term. Those countless bad mortages and toxic derivatives bought up by the Treasury a year ago, only to be buried somewhere in the accounting process, are a ticking time bomb that could eventually destroy the system, as we persist in trying to generate money through bubble economies. Continuing to hide our mistakes with the idea of starting over again at the taxpayers' expense is creating a false economy that ignores the interests of the consumer, shifts 'wealth' to the top, and disrupts the balance of global trade. To restore some sanity to our economic world, governments must come together to assert their rightful leadership in setting fiscal policies that promote fuller employment, a stronger social safety net, greater control of private investments, and the creation of more trustworthy credit instruments. This cannot happen if the arrogance and greed of Wall Street continues to stand in the way of reform. To solidify his arguments, Stiglitz presents a collection of useful statistics and viewpoints that underline the need for change now. For him, Obama isn't moving fast enough to get the needed results sooner than later. I recommend this book for anyone who is looking to move beyond the collapse of 2008 in terms of how these economic woes might play out in years to come.
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461 of 489 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.
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.
59 of 65 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.
"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.
38 of 46 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|Amazon 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.
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