on 5 September 2011
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.
on 27 September 2011
Joseph Stiglitz's finest popular book puts the nails in the coffins of 'self correcting markets' and 'all government intervention is bad' forever. It has taken the crisis of 2007-2008 and its aftermath to work Stiglitz up to a book of this quality. Some reviewers complain that the author's politics are laid bare in this book, and that somehow, this undermines the message. What utter rubbish.
Stiglitz proves that the recent 'freefall' is just the latest and possibly worst in a series of market disasters caused by Reagan and Thatcher's destruction of the regulatory framework that has kept the world safe from free markets since the 1930's. It is no mere one off, but the grand finale of crashes that began in Latin America, East Asia, Russia, and now America and Western Europe (starting in the dot com crash - the housing bubble was a continuation of the 2001 crash). These are no accidents but result from removal of incentives and regulations that made the 1945-1970 period so prosperous, and the last 30 years, so erratic. Though Stiglitz concludes that no serious adult can defend any longer unbridled free market theory from responsibility for this collapse, he underestimates the 'willful blindness' of so many economists and ordinary people, who cling to their ideology like demented religious fanatics. They are 'true believers' - people without a shred of rationality left.
What is most alarming and worrying about this analysis is the notion that in re-funding the banking sector in 2008, the Bush and then Obama administrations have made things even worse. How? They have created a greater core of financial power in the remaining banks. They bailed out investment banks (with no remit, as they have now ordinary FDIC responsibility) and then combined some of them with ordinary commercial banks - making them even more dangerous. They removed all responsibility from banks for their failures - as the government will bail them out - moral hazard, what moral hazard? They have created huge deficits - which conservatives are using as a hammer to bludgeon the victims of these crashes - ordinary people - and protecting those who caused it - the rich, greedy elite. Obama kept on the Bush team, proving he is either much more conservative than his party or that he was plainly ignorant of the economic argument underpinning the crisis.
And now Europe is set to use billions of taxpayer Euros to bail out the banks. The huge debt the world has run up is now being blamed on the victims, the welfare states are being dismantled, and still, no effective bank regulations have been put in place to stop the next disaster. In this book, Stiglitz provides enough clear warnings and clear instructions.
Buy this book for any of the conservative, free market wheeler dealer types you know for Christmas. They'll hate every word.
on 11 February 2010
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.
on 27 July 2010
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.
Within the framework of seismic shifts in the world order (globalization, leadership) J. Stiglitz analyzes the implosion of the capitalist system provoked by `special interests' with the mighty help of their friends in the economic profession, the rating agencies, the Fed and Congress. He criticizes ruthlessly governmental policies and proposes indispensable measures in order to prevent new catastrophes.
Implosion of the free market system
When in 2008 the US real estate bubble burst, banks worldwide were confronted with volcanoes of bad debt based on inflated US house prices. The trust between the banks evaporated and the core of the capitalist financial system came to a halt. Governments had to step in with phenomenal amounts of money in order to save the system and became the largest or unique shareholders of bank, car and insurance companies (perfect socialism).
The implosion was a clear-cut sign that markets are not efficient (information is imperfect) and not self-regulating. Repeatedly they have to be saved by governmental intervention (the taxpayer).
Economies need a balance between market mechanisms and governmental regulations with important contributions by non-market and non-governmental institutions.
The culprits and the victims
The real culprits are those who created the bubble, who invented new instruments of `risk' management, who had the clout to force through banking deregulation and financial mega-mergers, who would be `too big to fail'. In one word: special interests who control and manipulate the financial markets and the western world economy.
Millions of innocent victims worldwide lost their (full-time) jobs, their houses, their savings, their pensions and sank into poverty.
Governmental interventions (Obama = Oh!-Bank-Ma!)
Those pulling the strings in the Bush and Obama administrations chose to rescue the culprits, the banks, not the victims who lost everything. For J. Stiglitz, this is nothing less than ersatz capitalism: privatizing the gains, socializing the losses with the government as `bearer of risk of last resort'.
Remedies (the people not the special interests)
J. Stiglitz's solutions attack head-on the `free market' problems: in the US, reinstatement of the Glass-Steagall Act, the break-up of the financial conglomerates by spinning off the investment and insurance branches, stricter accounting standards (no `marks-to hope'), independent rating agencies, regulation and transparency of derivatives thereby requiring joint and several liability of all market participants on the exchanges.
The money squandered for the rescue of the villains could have been used for more fundamental issues like full employment, education for all, infrastructure, climate change, a social safety net, workforce mobility, aging population or the trade and budget deficits.
Worldwide, the gap between global demand and supply with the dramatic underutilization of human resources should be filled by effective international policies. Moreover, a new global reserve system is needed and monopolies should be broken.
This book gives an appalling picture of a western world dominated by a tiny oligarchy which has the clout to force its agenda through nationally and internationally against the interests of the many, thereby showing its moral depravity by only being interested in `naked grabs for money'.
This book, written in harsh vocabulary by a superb free mind, is a must read for all those who want to understand the world we live in.
One minor remark: there is no index.
on 8 June 2010
In this brilliant book, the noted American economist Joseph Stiglitz explores why the crisis happened. Across the world, the crisis destroyed 50 million jobs and thrust 200 million people down into extreme poverty. From December 2007 to October 2009 the US economy lost 8 million jobs and unemployment rose to 10.2 per cent. Only 58.5 per cent of the working age population was in work. 2.3 million Americans lost their homes in 2008 alone. Bank executives' contracts were sacred; workers' wage contracts were negotiable - down.
Stiglitz has a chapter called The Great American Robbery. The top 50 hedge and private equity fund managers got an average $588 million each in 2007. Nine US banks, which made record losses of $100 billion, got $175 billion public money, and promptly paid out a record $33 billion in bonuses. As the Chair of one of the House of Representatives' Committees said, "the banks run the place ... they give three times more money than the next biggest group." Stiglitz notes that the UK's partial privatisation of pensions shifted 40 per cent of their value out of the pensions and into financiers' fees.
The US government, like the British, has lent money to the banks at very low interest rates. Stiglitz asks, "Why not use the government's ability to borrow at a low interest rate to provide less expensive credit to homeowners under stress?" Banks that are `too big to fail' gain from this access to cheaper capital because lenders know that taxpayers will pick up the losses. So these banks grow at the expense of their smaller rivals.
Public money went to the big banks, which didn't lend to small and medium businesses, but kept the money for themselves, in bonuses and dividends. Early in 2009, Hank Paulson, Secretary of the Treasury, ex-Goldman Sachs, gave AIG $180 billion, which then gave Goldman Sachs $13 billion. By contrast, US aid to Africa in 2008 was $6.5 billion.
In the USA, financial firms back the student loans programme, a Public-Private Partnership in which the taxpayer bears the risk and private firms get the gains. The US government issues the loans, so there is no risk of non-payment, but the lenders still charge interest rates as if there were such a risk. Thus the US government gave the private sector $80 billion of taxpayers' money over the last ten years, because using private firms cost that much more than if the government had lent the money itself.
Stiglitz shows that markets are not efficient and self-correcting; they do not allocate resources efficiently, especially not to innovation; and they redistribute wealth (from the poor to the rich), they do not create it. He points out that "Tax cuts encourage consumption, when the government should be promoting investment."
The US government has embraced finance capital, so there is "a predictable outcome - future crises; undue risk-taking at the public expense, no matter what the promise of a new regulatory regime; and greater inefficiency."
on 3 June 2012
This is the best book I have read about the crash. Whoops (John Lanchester) is equally easy to read but offers very little by way of suggestions about where we go from here. Stiglitz outlines a fairly clear set of directions - though the current set of politicians seem unable or unwilling to consider them. I got completely bogged down with Charles Morris' "Two trillion dollar meltdown", though now, having read Stiglitz and Lanchester, I might give it another go.
The paperback edition includes an Afterword in which Stiglitz reviews what happened in the immediate aftermath of the crash and the measures to try to save the situation. This includes a few pages on the Euro crisis.
If you are an ordinary punter, like me, you will be angered by the greed, foolhardiness or ignorance and the herd instinct that led the world to our current economic situation. If you are a Keynesian economist you are probably already angry and this book will help you focus your ire. If you are a free market neo-classicist you will be angered by this devastating, polemical analysis.
Oh, and the paperback edition does include an index (see an earlier review) plus a very full set of references.
on 9 February 2011
The author writes in an extremely engaging style and describes perfectly the story behind the sub prime mortage crash and the solutions.
You can tell that a lot of the stories are slanted with his personal bias but not overly so and I do agree with him for most parts. The only thing which sticks out is his idea Independant Central Banks tend not to be a great thing. Seems to work for UK.
Maybe if you don't have the former Chairman of Goldman working for the Fed and other ex-bankers but academics like Mervyn King and economists than an Independant Central Bank would work. Simples.
Engaging, concise, read it in one go. Great read.
on 1 March 2010
This is a clear and devasting critique of the attitudes and actions that led to the latest, albeit largest, in a long line of financial foul-ups. It is always hard, with a book like this, to be sure of how seriously one can take the opinions of the writer. To what extent is this wisdom after the event, another slice of punditry and speculation, or the grinding of a particular axe? However, given the author's undoubted credentials and long and consistent record on the subject, one cannot but take this seriously. The analysis is clear and the opinions cogent. Prof. Stiglitz knows his way around the complexities of the finance industry, and lays out the details of the mess in clear and lucid language.
What is deeply troubling to discover, as an outsider, is the staggering depths to which the banking industry has sunk, and the seeming impossibility of dragging it back to some semblance of reason. The vested interests are now so huge and the stakes so high. If, as Prof. Stiglitz fears, there is just enough of an apparent recovery in the coming months and years to stave off any more searching questioning by those in power, the current situation may drivel on indefinitely. If his anaylsis is even half correct, this would be catastrophic.
The author's line is clear. The banks need to be brought to heel and forced, through strict regulation, to confine their attention to what they were designed to do in the first place: act as a safe haven for people's money and as a source of (properly assessed) loans for homes and businesses. Nothing more. Banking should be "simple and dull". Money should be a means of exchange and not a commodity in its own right. Simple principles; massive changes. Among the largest is that we, in the developed West, need to admit that our way is neither the only way nor remotely the best way.
For anyone even distantly interested in the hows and whys of the current crisis, this is unmissable reading.
on 1 November 2012
I just finished reading this book, and it is a classic Stiglet, after reading his "three trillion dollar war" I was anticipating his next book, and I was not disappointed. Very disturbing how the once who govern make policies that are detriment to the well-being of ordinary people. Greed in the end is an eternal downfall!