Freefall: Free Markets and the Sinking of the Global Economy [Paperback]

I am a chemist, not an economist, and being interested in understanding what went wrong with the world economy in the past few years, began reading some books on the subject. Having read some neoclassical (Chicago School) opinions (Raghuram G. Rajan's (with Luigi Zingales) "Saving Capitalism from the Capitalists" and "Faultlines"), I was left with the unsatisfying sensation that something was missing in their arguments. So, I turned to an opposing school of economic thought (the Neo-Keynesian School) and decided to read Joseph E. Stiglitz's "Freefall - Free Markets and the Sinking of the Global Economy". I have just finished reading it. What a lucid and clear-minded exposure of what led up to the problems that culminated in the 2008 financial debacles that have shocked the world! Stiglitz points out rather clearly (for someone who does not think in terms of political economy daily) how damaging the Reagan-Thatcher legacy and the subsequent hands-off, no-regulations policies of U.S. and U.K. (and many other) governments concerning financial markets have been to the world economy. (No wonder Margaret Thatcher gave up studying Chemistry - she couldn't possibly have made a good Chemist!). "Freefall" also discusses what was done by the Bush and Obama administrations to "solve" the misery created by the thieves who called (and most of whom continue to call) themselves "bankers". It took Obama off the mental pedestal I had put him on! Stiglitz suggests solutions to the problems which, not being an economist, I hesitate to judge. They seem rational and, more importantly, address the human misery that financial and political "leaders" (the thieves and their abetters) have created for us. Makes one wonder whether we should not find some other way to finance electoral campaigns in our so-called "democracies". This book should be made compulsory reading for all high school and undergraduate students and I highly recommend it to any literate person who likes to understand the world around him(her)self.

As the Former Chief Economist of the World Bank, and a Nobel Prize Winner, Stiglitz clearly can write with authority on the world economy, and this book certainly deserves to be on the reading list of all candidates and interested voters in the next Election, if they would like to understand why American Style Capitalism has brought such abysmal consequences to America and the U.K..

The markets failed their in societal functions of managing risk and the mixed motivations of the Rating Agencies meant that the Institutions were not adequately appraised of the risks that they were taking. "In short, there was little or no effective quality control". Securitization did indeed spread risk but this was more than negated by the asymmetries of information. In other words people had little idea of the detail of what they were buying.

Externalities are to economics what `collateral damage' is to the military; the damage caused to those who were not involved in the transaction. "If there are externalities, one can't logically believe in market fundamentalism." Contagion between financial institutions is of course the `quintessential externality'.

Many who were sold sub-prime mortgages were ill equipped to understand what they were taking on, and yet they lost their homes, life savings, and dreams of a better future. Many were driven to divorce, some to suicide. The `deregulation frenzy' of the eighties and nineties left these people ill protected. Some of the thrust for deregulation was undoubtedly inspired by political campaign donations by Financial Institutions.

Many of the financial products that were bought and sold by the banks were based on flawed models which were often evaluated by `lawyers untrained in the subtle mathematics of the models'.

The Obama administration avoided nationalizing the banks, but it stands accused of socialising the losses and privatising the gains - what Stiglitz calls `Ersatz Capitalism'. Paradoxically the belief in free markets has led to the largest Government intervention in history. It has also been shown conclusively that the term `self-regulation' is an oxymoron.

Serious though the subject matter is, this book is easy to read, and offers many excellent ideas on the way forward for a better kind of capitalism.

Joseph Stiglitz has made the transition from being at the centre of one of the main institutions of the Washington Consensus, to a principled opponent of these very same institutions, and the current "free" market orthodoxy which still tenaciously holds it grip on economic thinking at the global and national level. In "Freefall" he looks at the current economic debacle, how it happened, its origins, the inadequate response, as well as speculating on what might get us out of this awful mess. His focus is almost wholly on the US experience with only occasional sideway glances at events in Europe and across the globe.

The narrative of the events, and processes, that led to the credit crunch are put before the reader in a concise and comprehensive manner, including the variety of complex financial innovations that contributed to the crash. Stiglitz then looks at the Bush and the Obama administrations, he is fairly scathing about the latter, in particular regarding his economic team, almost all of them have played a part in getting the US economy into its current state. Unsurprisingly he finds their responses to be inadequate, and primarily focused at preserving financial institutions that have failed, and a policy environment that has failed, at the expense of the majority of the US population (he calls the bank rescue program "The Great American Robbery"). Stiglitz appears to favour some sort of bankruptcy proceeding for banks, as well as legislating for a return to the separation of commercial banks from investment banks, amongst other measures.

Next Stiglitz looks at the mortgage industry, particularly the sub-prime segment of it. The details of the practice of this industry in the US (and even in the UK where 42% of mortgages applications are apparently still self-certified) is enough to make the jaw drop of even the most cynical of readers. This is followed with a more general appraisal of Americas position with rising public debt, it's relationship with China, and a still dysfunctional financial sector.

One of the more interesting chapters is Stiglitz look at the rise and failure of the free-market economics: one still awaits its fall or it being reduced to its proper place. Issues highlighted include persistent failure to deal with reality as opposed to the asinine assumptions it makes regarding it, the poor record it has regarding growth, and its failure to improve the circumstances of the American population (US GDP grew by 10% between 2000 and 2008, median household income fell by 4%!). The final chapter "Towards a New Society" steps back from the crisis and looks at how we can begin to move towards a society that works for the majority of the population, rather than one run in the interests of the few.

A stimulating read, that packs a surprising amount of narrative, analysis and thinking into 300 pages. One shortcoming is that despite being fully referenced the book omits an index. I assume this will be rectified when "Freefall" is published in paperback? A book that I would have no problems recommending to anyone interested in how the economic crisis came about, the resulting response, it's roots, as well as some more fundamental thinking on the whole debacle.