Customer Reviews

Freefall

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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 The historical references, when combined with his critique of the past few decades of deregulation and of the Chicago school economists, make a compelling case.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.

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.